A cap weighted sovereign bond index will put the most indebted country at the top – and Japan with a hefty 396% total debt to GDP ratio leads the index by quite some margin.
But analysis from exchange-traded product provider Source shows that investors may be better off investing in some emerging market jurisdictions, which have proven to be ‘stars’ in the global debt league.
Paul Jackson, head of research at Source, said the most striking feature of debt in emerging economies was the relative lack of it. He said that although China has been the focus of debt concerns in recent years, if investors were worried about debt in China then they should really be worried about some other countries, in particular Japan, the Netherlands and France (see table).
The research shows that based on their debt fundamentals, emerging markets are better placed than most developed markets, which make the yield premiums on their bonds even more attractive. In fact, debt/GDP ratios in most emerging countries are well below global norms.
Debt held domestically is less of a threat to an economy than if it is held by foreigners, therefore the firm highlights Indonesia and Russia as ‘stars’ with external debt to GDP ratios of 34% and 39%, respectively. Both countries’ debt is largely domestically owned.
Despite this analysis, Jackson said the market is unlikely to recognise these countries anytime soon.
Total Debt/GDP in 2015 (%) of world’s top 20 economies:
Japan: 396%
Netherlands: 326%
France: 310%
Spain: 301%
Canada: 295%
Sweden: 293%
Italy: 290%
UK: 270%
US: 246%
Australia: 241%
Switzerland: 235%
China: 233%
South Korea: 233%
Germany: 183%
Brazil: 138%
India: 120%
Turkey: 113%
Russia: 84%
Mexico: 71%
Indonesia: 64%
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