Foreign investments in emerging markets or in fully industrialized nations becomes more challenging as the world sinks further and further into debt. World governmental debt now stands close to 60 trillion dollars and is rising rapidly. Unfunded liabilities reach into the quadrillions. These are astronomical figures that would have been unfathomable just a generation or two ago.
Why does it matter? When government debt rises faster than economic growth and output it leads to a number of things. Higher taxes, cuts in services, and of course increasing governmental interference in the economy as the government’s share of GDP continues to rise.
It also leads to political instability because the debt must be rolled over or refinanced at regular intervals. This puts governmental leaders in precarious positions. In attempting to deal with the resulting problems of rising debt political decisions made can very well lead to defeat at the next election.
This has been the situation in the European Community as one government after another falls as a result of the financial crisis of 2008.
The biggest world debtors in relation to GDP read as a list of who’s who because they are some of the biggest and most influential players in the world economy.
In North America the winners are the United States, Canada and Mexico. Public debt in the first two nations are over 80% of GDP. Mexico is less than 40% but the increase in 2012 alone for example, was 13.8%. In the United States is was 12.2% and Canada 4.3% for the same year.
In South America the “winner” is Brazil at 54.6% with an increase of 11.3%. As the second largest economy Argentina comes in at 39.5% with an increase of 3.7%.
Colombia,Venezuela, Peru and Uruguay measure 36.8%, 48%, 15.8% and 39.6% respectively. In the case of Uruguay the annual debt increase has slowed to less than 2% and in Peru it is actually declining -0.6%. The annual increase for Colombia is 9.3% and Venezuela it is 11.3%.
In Europe our biggest debt offenders are, The United Kingdom, France. Spain, Germany, The Netherlands, Belgium, Italy and Greece. Not far behind are Ireland, Portugal, Norway, Sweden, Poland, Austria and Switzerland. Right behind them are the majority of the rest of the countries. The exceptions being the Baltic Republics and a few countries in the former Yugoslavia.
The United Kingdom share of debt in relation to GDP stands at 95.6% and increased 9.2% in 2012 alone. When a nation reaches and goes over 100% of GDP the problems associated with debt begin to magnify substantially.
Germany’s debt stands at 84% of GDP. The percentage increase is negligible and actually is beginning to move in the other direction as national and state budgets begin to balance and the country starts to pay down the debt. It is by far among the leading industrial nations of the world an exception.
France is at 94.4% and the increase has slowed to 2.6%. The situation in Spain is better at 80.4 with a 3.8% annual increase. Italy has passed the 100% barrier of GDP to debt ratio with 121.4%. The situation here has become critical. So much so that there was an actual decline of -2.0% in 2012.
Our worst offender in Europe is Greece. Governmental debt now stands at 153.9%. However, when you reach debt at these levels it is difficult to manage. There has been a dramatic annual reduction of -14.4%. This is because Greece has balanced it’s annual budget and is no longer assuming further debt. Primarily because it can’t. A nation must have someone who is willing to finance it.
Scandinavia and Eastern Europe for the most part have debt levels that are near or below 50%. These rates are much easier to maintain and manage as long as there is some economic growth to be had.
In recessions social spending will often increase as governments move to ease the suffering of their citizenry through difficult periods. It is easy to predict that more turbulent times are to come and therefore more government social spending will follow.
In Asia our top contenders are Japan, India, Russia and believe or not, China.
Japan’s public debt as a percentage of GDP is a whopping 237.9%. It says something about the Japanese that they are able to manage this high debt load. It is only possible because of the high rate of savings among the Japanese people and that the debt is owned by the Japanese people themselves. It is therefore an internal matter. There are no international creditors or institutions knocking on the door demanding changes or austerity.
It must be said though that a return to governmental spending by the Japanese government in a hope that a stimulus will bring more economic growth is questionable. Before this latest move the debt had actually declined by -1.4%. A return to spending will soon reverse that. The Japanese are definitely entering uncharted waters here.
India’s debt has breached the 50% level only recently. The concern here is the rapid increase which was 17.9% in 2012 alone. Those kind of increases are unsustainable to be sure.
Russia’s debt is relatively low at 8.1%. The problem here is the rate of increase which was 15.4% in 2012.
China makes the list not because of the large amount of public debt in existence which is only 16.6%. The concern here is the rapid increase. In 2012 that was 14.9%. It is a troubling amount when one considers China’s huge trade surpluses.
The nations of Vietnam, South Korea, Taiwan, Malaysia, Thailand, Indonesia, Bangladesh, Sri Lanka, The Philippines and surprisingly even the enormously successful nation of Singapore are in the second tier.
Vietnam gets special scrutiny not because of the overall size of the debt but the rapid increase which was 11.3% in 2012. South Korea has managed its debt quite responsibly. The public debt only stands at 29.7% of GDP and the increase is at 1.2%
Taiwan comes to attention again not because of the size of the debt at 42.5% but the annual increase. In 2012 that was 17.7%. The same can be said for the Philippines at 48.1% and 10% respectively.
Malaysian public debt is getting high at 60.4% but the real concern here is again the rate of increase with 15.5%. Thailand comes in at 51.4% but again the rate of increase is high at 15.7%. Indonesia is the more responsible party here with a 25.3% debt accumulation but the 11.7% increase will prove to be unsustainable.
Singapore is a surprise as efficiently as the country is run. Its public debt stands at 95% and the increase is at 8.8%.
Bangladesh and Sri Lanka come in at 31.5% and 80.5% respectively. The rates of increase of 3.7% and 5.8% are manageable at this point.
Australia has been more responsible than many nations have been with debt. Their share stands at 27.2% and it is only increasing at 0.5%.
New Zealand is now at 47.5% but the increase is rather high. It was 12.0% in 2012 alone.
In the Middle East our top rivals in the debt game consist of Turkey, Iran, Pakistan, Saudi Arabia and Bahrain. Bahrain is on the radar because the accumulation of debt stands at 62.0%. However, the increases have at least stopped.
Turkish debt ratio is only at 38.3% but the interest here is the annual rate of increase which in 2012 was 13.8%. Iranian debt is very manageable at 13.9% but the rate of increase is very high at 14.3%. Pakistan is still below 50% at 47.7% but the rate of increase is now too high at 13.2%.
Saudi Arabia again is the big surprise. If a nation with such large cash earnings from oil is in debt it is obviously an almost insurmountable problem. The rate is only 13.6% but the rate of increase is 10.1%
Iraq does not have any available information and the rest of the Persian Gulf countries have either very manageable debt rates or very little debt at all.
The last place of investigation is Africa. Here it is often difficult to find reliable information as well as having rather low rates of debt in many cases because there is no money to lend internally. Internationally there is little enthusiasm to lend more money to this region of the world. The five countries of higher debt that are of particular interest consist of Egypt, Sudan, Morocco, Nigeria and of course South Africa.
Egypt leads the pack at a debt ratio of 79.1% with an annual increase of 11.5%. Sudan has now breached the 100% level at 102.5% but the increase is now in decline at -2.9%. Morocco is nearing 80% with 76.9%. The major worry here is the large annual increase at 9.8%.
Nigeria comes in low at 18.5% in public debt in relation to GDP. The rate of increase though stands at 7.1%. Finally, South Africa is under 40% at 38.4% but the rate of increase at 16.4% is alarming. The overall rate of economic growth in Southern Africa is very much connected to this vital economy.
Anyone investing overseas needs to keep the rates of individual country debt and the annual increases incurred in focus. This knowledge will assist one in determining the long term viability of a nations economy and ultimately the investment itself.
There is no doubt that the world as a whole is addicted to ever increasing amounts of debt and that this will in turn lead to mounting challenges for the investor in the years ahead.