Rising global interest rates could prompt a new credit crunch in emerging markets, as businesses that have ridden the wave of cheap money to load up on debt are pushed into crisis, the International Monetary Fund has warned.
The debts of non-financial firms in emerging market economies quadrupled, from $4tn (£2.6tn) in 2004 to well over $18tn in 2014, according to the IMF’s twice-yearly Global Financial Stability Report.
This borrowing binge has taken business debt as a share of economic output from less than half, in 2004, to almost 75%.
China’s firms have led the spree; but businesses in other countries, including Turkey, Chile and Brazil, have also ramped up their debts — and could prove vulnerable as interest rates rise.
With the US Federal Reserve expected to raise interest rates in the coming months, the IMF warns that emerging market governments should ready themselves for an increase in corporate failures, as firms struggle to meet sharply higher borrowing costs.
That could create distress among the local banks who have bought much of this new debt, causing them in turn to rein in lending, in a “vicious cycle” reminiscent of the credit crisis of 2008-09.
