The turmoil in global capital markets this month underscore concerns that high debt levels in developing countries, particularly in Asia and Latin America, threatening global economic growth, writes Wall Street Journal. According to the international banking group Institute of International Finance last year, the outflow of capital from emerging markets has reached half a trillion dollars. This leads to concerns that highly indebted companies from these regions will still face problems.
Expectations and reality
After years were the engine of the global economy, emerging markets now find themselves caught between declining growth and tight credit conditions. This squeezes the private sector in these countries, which accumulated substantial debts in times of low interest rates. Companies use loans for expanding capacity, relying on consumption growth, high commodity prices and strong economic growth.
The average GDP growth in developing countries, however, fell by 4% last year. This is nearly 3 BC. Points lower than the projections made by the International Monetary Fund in 2011. Oil prices and other commodity in turn fell to the lowest levels in a decade. “Companies have staked their financial plans in growth that could be twice as high than real,” says David Hensley, an analyst at JP Morgan Chase.