While the industrialized world has raked up a mountain of debt in the last ten years amounting to almost 120 percent of GDP, emerging economies have managed to cut their debt in half.
During the 1990s almost all of the ten largest emerging economies found themselves at least once in the midst of a serious financial crisis. India was first:rising government spending and decreasing tax revenues between 1989 and 1991 led to an economic and financial crisis with the usual symptoms of high inflation and rising government debt. The withdrawal of international capital and a shortage of foreign currency led to the country's creditworthiness falling almost to junk status.
In Mexico the crisis came in 1994 when the government failed to keep the peso fixed to the US dollar. There was a general crisis of trust, which led to a massive exit of international capital. That caused difficulties for Mexican companies - which led to a broad economic crisis known as the tequila crisis.
In 1997, Korea and Indonesia got into trouble; in 1998 it was Russia and Brazil. In 2001, the bankruptcy of Argentina was the largest ever recorded default. Among the ten largest emerging economies (EM-10), only China and Saudi Arabia managed to avoid a financial crisis.
All in the past
But that's all history now. According to Markus Jäger, who has researched the issue for Deutsche Bank Research, "Due to drastically improved external and public debt, debt crises in the ten largest emerging markets are a thing of the past. Government debt in the EM-10 countries has on average dropped from 50 to 25 percent of GDP since 2000. The G7 country's debt has in the same time risen from 80 percent to 120 percent of GDP."
Indonesiaand Saudi Arabia for instance have recorded a drop in government debt from 95 and 87 percent of GDP down to 25 and 8 percent. Brazil and India still have high debt levels, at around 70 percent, but it's far less than the average of the developed world. Also, their debt is almost entirely denominated in their own currency and much of it is held domestically. This makes the governments a lot less vulnerable to the erratic fluctuation of foreign capital markets.
Indeed, the foreign trade position of the E-10 countries has significantly improved. "Average net foreign debt has dropped from more than 30 percent of GDP at the end of the 1990s down to under 10 percent," says Jäger. "The EM-10 countries are right now much better integrated into the global economy than just 10 years ago."
But Jäger points out that there is another side to the coin: the EM-10's strong integration into global trade "has also made them more vulnerable to outside shocks, like the international financial crisis of 2008 or the current eurozone crisis."
But still the improvement in their fundamental position has given these countries a lot more economic room. "Most countries would now be able to react to growth setbacks by anticyclic policies." In other words, their moderate level of debt allows these countries not only to avoid budget cuts in a crisis, but also if necessary to inject money to boost economic activity.
Jäger concludes, "The largest emerging markets are seeing a substantial improvement in their financial situation - both compared to the industrialized world but also in absolute figures."
Meanwhile, current forecasts suggest that, by the middle of the decade, the G7 countries will have a level of debt six times higher than that of the EM-10.
Although their increasing integration into the global economy has made the EM-10 countries more vulnerable to external influences and fluctuation, the solid basis of their economies leaves them better protected against the kind of crises to which they were subject in the 1980s and 90s.