MacroscopeA new credit crunch threatens to squeeze global economy
Their economies are very exposed to potential downturn in credit conditions and policymakers may find themselves stumped for a solution
Bad news tends to come in threes, so the saying goes. The world economy weathered hardships recovering from the US housing-market-triggered "credit crunch" of 2008-9 and the euro-zone financial storm in 2010-12. But it is not the end of the story. A bigger crisis may be brewing.
World financial markets are now in grave danger of another breakdown in asset values which could mark another lurch into a global credit crunch. This time emerging market economies are in the forefront of the deepening crisis - one that could leave global policymakers seriously stumped trying to solve.
Emerging market economies are extremely exposed to any potential downturn in credit conditions. After a decade-long corporate borrowing binge, fuelled by a flood of cheap money surging into the global economy, emerging markets have ended up highly indebted.
The IMF is particularly worried. According to the International Monetary Fund's Global Financial Stability Report, corporate borrowing in emerging market economies quadrupled from US$4 trillion in 2004 to more than US$18 trillion in 2014. Business debt as a share of gross domestic product has risen close to 75 per cent, from about 50 per cent in 2004.
In the IMF's view, this is unsustainable, especially given world trade flows are down 10 per cent from a year ago, commodity prices close to 25-year lows and the US Federal Reserve continues to sabre-rattle for higher rates. The emerging markets' ability to weather falling revenues and rising debt costs at the same time could prove a toxic combination.
It could easily trigger a major funding crisis. With the Fed threatening to raise interest rates at any time, the IMF warns emerging markets must be prepared for a rash of corporate failures as firms struggle to meet rising debt commitments.
Contagion risks could run high. Shocks to the corporate sector could quickly spill over into the financial sector, sparking a vicious cycle as banks rein in lending with negative connotations for economic confidence and growth. It would mark a grim rerun of the credit crisis of 2008-9 that could rapidly spread across the globe.