Once upon a time, when Greece was best known as the home to Mount Olympus and birthplace of gyros, debt issued by governments of advanced economies was considered to be “risk-free.” But after years of providing social benefits well beyond their means, a new age of austerity has dawned. Perpetual demand for sovereign debt is no longer a given, as investors have taken begun examining government balance sheets in a level of detail usually reserved for junk bonds (see Six ETFs To Watch As The Greek Drama Unfolds).
Historically, investors paid relatively little attention to the debt balances of advanced economies. But as the possibility of a sovereign debt crisis has escalated, this metric has become an important measure of risk and a country’s fiscal flexibility. A report released by the International Monetary Fund (IMF) last week painted a rather grim picture. According to the IMF, debt for a group of 29 industrialized nations will increase from almost 91% of GDP this year to 110% in 2015, highlighting the extent to which developed economies have relied on debt to survive the recent downturn.
While mountains of debt will obviously impact the rates at which these governments can borrow money, the fiscal situation can also impact the prospects for equity markets. According to the IMF, developed countries’ growth rates may slow by more than 0.5% per year unless they reduce debt to pre-recession levels. Some advanced economies face a tougher road than others: Japan’s 2010 debt is projected at more than 225% of GDP, while Belgium, Greece, and Italy all top 100% (the U.S. comes in at a somewhat alarming 92.6%).
Emerging Markets: Less Is More
Despite panic The debt crisis isn’t a major concern in every corner of the globe. In contrast to the industrialized nations, emerging markets are expected to see their debt-to-GDP ratios begin declining in 2011. “This is predicated on sustained growth and relatively low interest rates, as country-risk premiums and bond yields have fallen rapidly since the spike in risk aversion early in the crisis,” reads the IMF report (PDF). Public debt in 2015 is projected to be almost 5 percentage points of GDP lower than before the crisis, a remarkable accomplishment for economies that many investors continue to view as excessively risky.
Events of recent weeks have made it clear to investors that the global economy isn’t out of the woods yet. With a “double dip” now an increasingly likely scenario, fiscal flexibility among governments is both extremely rare and extremely important. Below, we profile five ETFs focused on countries with low debt-to-GDP ratios (for more ETF insights, sign up for our free ETF newsletter):
iShares MSCI Chile Index Fund (ECH)
Projected 2010 Debt/GDP: 4.4%
When copper prices were soaring earlier this decade, Chilean president Michelle Bachelet came under fire for her unwillingness to spend freely.When copper prices cratered along with most other assets, her fiscal prudence looked brilliant, allowing Chile to aggressively combat the recession.
SPDR Russia ETF (RSX)
Projected 2010 Debt/GDP: 8.1%
Russia is one of the world’s most unique economies, still heavily reliant on the energy sector to drive growth. Although corruption is still rampant, the Russian government has been aggressive in managing its debt balance, recently paying off the last of its Soviet era debt in an effort to re-enter international capital markets after a decade on the sidelines (see Seven Corrupt Country ETFs).
IQ Australia Small Cap ETF (KROO)
Projected 2010 Debt/GDP: 19.8%
With most developed markets facing significant debt burdens, Australia continues to stand out for its relatively strong balance sheet. After becoming the first developed nation to raise interest rates after the recession (an event still months away in the U.S.), Australia now maintains debt equal to less than 20% of GDP.
Disclosure: No positions at time of writing.