Debt ratios outside the financial sector in Brazil, China and India are almost as high as they have ever been since 1996, just before the last emerging market financial crisis, according to the International Monetary Fund (IMF).
The IMF says inflows into emerging market equities can enable companies, particularly lower-quality firms, to pile up debts.
Several British investors, most notably Guy de Blonay, the manager of the Jupiter Financial Opportunities fund, have pulled out of Chinese banks because of concerns about overheating and tightening monetary policy. (article continues below)
“Although most measures of equity valuations are within historical ranges, ’hot spots’ appear to be emerging in the equity markets in Colombia and Mexico and, to a lesser extent, in Hong Kong, India and Peru,” the IMF says in an update to its Global Financial Stability Report.
The IMF notes that debt ratios are also approaching 14-year highs in Chile and Korea.
However, the IMF also criticises developed nations for their lack of progress in reforming their financial sectors.
America has yet to reform its housing sector, particularly the government-sponsored enterprises which underpin it, the IMF points out.
The weaknesses of eurozone banks also remain entwined with the poor state of national finances.
The IMF says barely any progress has been made on deleveraging, meaning that banks are still reluctant to embark on new loans.