Recent signs of stabilization in emerging markets may merely be the calm before the storm––a $1.6 trillion debt mountain is due for repayment in the next five years, a steep rise in maturities that could stir fresh trouble.
The debt-servicing hump––with annual repayments jumping by more than $100 billion by 2020 compared with 2015––is a result of a borrowing spree after the 2008 financial crisis.
From African governments to Turkish banks, developing world borrowers flogged their debt on hard-currency bond markets in post-crisis years, encouraged by near-zero U.S. interest rates that sent investors hunting for higher yields.
But it's payback time.
Almost $1.6 trillion is due for repayment from 2016 to 2020 with corporate debt accounting for more than three-quarters of the total, according to data from ICBC Standard Bank.
Until now, a relatively light maturity schedule for company debt along with rock-bottom global interest rates have capped defaults in the $2 trillion corporate debt sector. But weak commodity prices, higher U.S. interest rates and above all, the sheer volume of repayments could make things tricky.
"The wall can't move out, and there are two reasons for that" said Bhanu Baweja, UBS head of emerging markets research.
"One is that it is so levered up already and it is levered up precisely in the sectors that could see trouble––financials and energy––but also because global markets have become less generous than they used to be."
Many emerging governments have seen their credit ratings downgraded in recent months and many more could follow, doing little to soothe investors' nerves.
A likely pressure point is the energy sector after a plunge in crude prices to below $30 earlier this year, from more than $110 just 18 months ago.