Is U.S. Dollar Debt a Concern for EM

October 19, 2015 |Author: EGA Investment Strategy | Categories: Chart of the Week, Emerging Markets

Rising U.S. dollar liabilities. U.S. dollar liabilities of emerging market (EM) economies have been steadily rising over the last 10 years, now topping over $5.7 trillion. This rise has been the result of low U.S. dollar borrowing costs. Now that the U.S. Federal Reserve is considering raising rates for the first time in almost a decade, there is concern is that a further rise in the U.S. dollar could further impair the capacity of EM economies to service their debt.

Is this a concern? While the sheer size of U.S. dollar debt in EM is large, it is important for investors to consider this in the context of the overall economic output in EM.  Specifically, when these liabilities are measured as a percentage of gross domestic product (GDP), a different picture emerges. Since 1980, liabilities peaked at 23.4% of GDP in 1986, but have dropped thereafter.  They appear to be range-bound since 1990, representing 19.1% of GDP currently, indicating that concerns highlighted by the media appear to be overblown. 

Find out what EM investors need to know in the Q3 Emerging Markets Update.


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