MEA least vulnerable as emerging market external debt trebles to $8.2t

The Middle East and Africa region has the lowest external vulnerability in the current global scenario where emerging and frontier market external debt has almost tripled from $3.0 trillion in 2005 to $8.2 trillion, Moody's Investors Service said on Thursday.
However, in the aftermath of the oil price plunge and dip in revenues, the two indicators - as measured by external debt to GDP (gross domestic product) and external debt to reserves - of MEA countries increased recently, the ratings agency said.
While external debt to GDP has risen to 43 per cent in 2015 from 36 per cent in 2011, the average external debt to foreign exchange reserves ratio for the region has climbed to 258 per cent in 2015 from 219 per cent in 2011 on the backdrop of the increasingly vulnerability faced by emerging market economies to external shocks after a decade-long build-up of debt.
Although the Middle East and Africa region on average has the lowest external vulnerability, the UAE and Qatar represent the largest shares of external debt in the region respectively, followed by South Africa where the debt-to-GDP ratio has grown over the decade.
According to Moody's total emerging and frontier market external debt - defined as debt owed by residents of a country to non-residents - has almost tripled from $3.0 trillion in 2005 to $8.2 trillion at the end of 2015. "Debt is now growing faster than GDP and faster than foreign exchange reserves for many of these countries."
The increase in debt is being driven by the growth in private debt, rather than public debt. Since 2005, private sector external debt has grown at an annual rate of 14.3 per cent compared to 5.9 per cent growth rate for public sector debt.
Moody's expects that global economic growth will remain sluggish for the medium term and commodity prices will stay low for several years going forward. "This will affect foreign exchange revenues and reserve accumulation for commodity exporters. The potential for capital flows to slow, should US interest rates continue to rise, would also exacerbate the debt situation in emerging economies," it said.
The World Bank and the International Monetary Fund have revised down the global growth for the third time this year. The World Bank downgraded its 2016 global growth outlook to 2.4 per cent from the 2.9 per cent pace projected in January on the back of sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows, while the Washington-based IMF lowered the baseline global growth forecast to 3.1 per cent in 2016 and 3.4 per cent in 2017, modestly relative to the April 2016 World Economic Outlook (by 0.1 percentage points for 2016 and 2017, as compared to a 0.1 percentage point upward revision for 2017 envisaged pre-Brexit. 
"Even though developments differ by country, these trends show that emerging and frontier markets are now more susceptible to economy-wide crises than they were a few years ago," said Elena Duggar, an Associate Managing Director at Moody's. "While sovereign debt profiles have improved, the increase in private sector debt is making sovereigns more vulnerable to contingent liabilities."
Moody's in its report "The Evolution of Emerging Markets External Debt: Private Sector Debt Drives Broad-Based Build-Up of Emerging Markets External Vulnerability Risks" analyses the growth in debt in 83 emerging and frontier market economies over the last decade, breaking down the data for four regions: Asia Pacific, Latin America and the Caribbean, the Middle East and Africa, and Emerging Europe. - issacjohn@khaleejtimes.com