Are Structural Reforms Needed to Sustain Emerging Markets Growth?
Is There a Window of Opportunity for Emerging Market Assets?
Evidence of structural reforms addressing excess debt, industrial overcapacity and low corporate profitability is needed, particularly in China, to spark a sustainable EM bull market. Policies currently supporting Chinese growth are actually increasing structural imbalances.
Market Realist – Structural reforms are necessary to address economic concerns
Many emerging markets (EEM) are experiencing slower economic growth amid global headwinds. These headwinds include weak external demand, declining commodity prices, and insufficient liquidity. There’s a growing feeling among economists that structural reforms are necessary to address the current economic challenges and move to a higher growth trajectory. Reforms that address excessive debt and industrial overcapacity are central in this regard.
Excessive debt
Some of the emerging markets (IEMG) are saddled with huge debt. They accounted for almost half of the growth in global (EFA) debt from 2007 to 2014. Despite this, many are constantly raising debt to fund deficits.
According to Thomson Reuters data, in the first quarter of 2016, sovereign issuers raised debt worth $44 billion. That was the highest in more than 15 years. Argentina, which has a junk rating, intends to raise up to $15 billion this year, the first time since its 2001 default.
Huge debt is a concern for many developing nations, including China (FXI) (MCHI). Total debt as a percentage of GDP in China has swelled to around 300% since 2007. In addition, companies in developing nations have about $435 billion to repay in the next ten years. A slowing economy with huge sovereign debt isn’t an attractive proposition.
Industrial overcapacity
The slowing global economy has led to excessive capacity in many industries. Reforming its inefficient and debt-ridden state-owned industrial sector is one of the biggest challenges facing Chinese policymakers in their effort to overhaul the country’s economic model. The steel sector is one of the most prominent examples of an industrial overcapacity causing a problem for the economy.
In the next part of our series, we’ll see if it’s time to revisit emerging markets.
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