Credit to the private non-financial sector in emerging markets has been increasing over the past 20 years, outpacing the growth in advanced economies in 2012. It reached a record high in 2020 at 114% of gross domestic product, according to data from the Bank for International Settlements.
Macroeconomic stability, financial deepening, availability of new lending instruments, economic growth and ultra-low interest rates explain borrowing expansion. Corporate debt has grown in countries such as China and Turkey in particular.
In China, the corporate component of the total debt is the highest in the world, with a significant proportion of funding supplied by non-bank financial institutions.
In both emerging markets and advanced economies, credit expansion reached a peak in 2020 and has been on a normalising path in the past couple of years.
Credit growth has a significant impact on economic growth, but also presents challenges. As interest rates rise, the growth of corporate debt in developing countries might now pose a risk, especially where debt is denominated in foreign currencies. If the local currency depreciates, repaying or refinancing debt becomes more difficult.
At the same time, countries such as Mexico, Indonesia, Russia and Brazil have developed local financial markets and are issuing local currency debt to domestic investors such as pension funds and banks.
