Is it time to worry now that emerging market sovereign debt tops USD 11.7 tn? That’s the question Capital Economics asks in its latest note (pdf). Despite the Nostradamus undertones of the question and Capital Economics itself estimating that EM debt is leaning closer to USD 13.6 tn, the note is not all that negative. “Emerging markets GDP has grown significantly over the past 15 years – meaning the flow of income available to service government debt has also increased,” according to the note. As a share of aggregate GDP, EM government debt was actually lower last year than it was in 2000. Meanwhile, EMs ability to service debt has improved, with around 75% of EM government debt now issued in local currency (up from 69% in 2000) and average maturities lengthening.

But it’s not all rosy, as the combination of debt and high budget deficits is worrisome. Over the coming decade the amount of budget deficits which are “sustainable” will be reduced, structurally impacting GDP growth. A global bond sell-off would start to present problems for several emerging markets, notably Egypt and Brazil, the analysts warn. It also notes that while the trend of local currency bond issuance is growing, it is not universal among EMs. Another factor to look for is how private debt can then be transferred to the public sector as credit bubbles unwind.