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Fitch warns emerging markets of Brazil-like mess on private debt

[LONDON] As if political turmoil, commodity-price meltdown and growth hiccups aren't enough, emerging markets face a threat to their creditworthiness from an entirely different area, - the burgeoning debt of households and companies.

Private-sector borrowing as a proportion of gross domestic product will reach 77 per cent by the end of this year in seven large developing nations, Fitch Ratings said in a report Wednesday. Such liabilities have exceeded government debt levels, exposing their economies and financial systems to "downside risks," analysts Ed Parker and James McCormack said.

The countries - Brazil, Russia, India, Indonesia, South Africa, Turkey and Mexico - are seeing an increase in their private-debt burden in 2015 because of currency depreciation, according to the report. That could weigh on their governments' credit rating through weaker GDP growth, worsening budget deficits, pressure on foreign-currency reserves or further exchange-rate fluctuations, Fitch said.

"Private-sector debt has often migrated to sovereign balance sheets in past financial crises," the analysts wrote. "A stress situation could feed through to pressure on sovereign creditworthiness." Among the countries studied by Fitch, Brazil had the highest proportion of private borrowings relative to GDP, at 93 per cent, and Mexico had the lowest, at 47 per cent. The increase between 2005 and 2014 was also the greatest in Brazil. The challenges facing the South American country will eventually confront others, the report said.

Of the seven countries studied, all except Mexico have either BBB- or BBB with a negative outlook and are therefore close to the junk-rating threshold, according to Fitch. Domestic banks in these nations were the primary source of lending, it said.

"They would face risks of increased non-performing loans, weaker profitability and potentially the need for recapitalization in the event of a systemic crisis affecting corporates or households." China was excluded from the group because its data would skew overall figures for emerging markets, it said.