Emerging markets (EM) have been largely stable amid a slew of fear-inducing events, such as the attempted coup in Turkey and the Nice terror attack, but a new report could dampen the sector's shine to long-term investors.
EMs have found themselves in favor again after a wobbly 2015. For the week ending July 15, EMs attracted the strongest level of portfolio inflows since September 2013, the Institute of International Finance (IIF) noted on Wednesday. Financial institutions, including BlackRock and Bank of America Merrill Lynch, have struck a bullish note on EM equity and credit markets, citing the sector's high yields and support from easy monetary policy.
But that resilience may not last long.
Moody's warned on Thursday that debt is now growing faster than gross domestic product (GDP) for many EM economies, making them vulnerable to external shocks.
"Total emerging and frontier market external debt—defined as debt owed by residents of a country to non-residents—has almost tripled from $3 trillion in 2005 to $8.2 trillion at the end of 2015."
Private debt is to blame, according to the ratings agency.
"Since 2005, private sector external debt has grown at an annual rate of 14.3 percent compared to 5.9 percent growth rate for public sector debt."
Asia-Pacific was leading the credit build-up, with debt levels rising at an average rate of 13.5 percent a year—more than any other EM region.
China, India, Indonesia, Taiwan and Malaysia were the particularly worrisome countries in the region, Moody's said.
Indeed, the latter is often flagged as the nation with the highest level of household debt in Asia, at 89.9 percent of GDP, according to local news reports.
"Emerging and frontier markets are now more susceptible to economy-wide crises than they were a few years ago," said Elena Duggar, associate managing director at Moody's. "While sovereign debt profiles have improved, the increase in private sector debt is making sovereigns more vulnerable to contingent liabilities."
Sluggish global growth, low commodity prices and the looming risk of tighter U.S. monetary policy are all expected to exacerbate the EM debt situation in the future, Moody's warned.