Emerging markets’ net liabilities, not gross debt levels, are what really matter. Even though debt levels have surged among emerging markets, fear of a potential borrowing bubble are overblown, Goldman Sachs suggests. Net international investment positions (NIIPs), which take into account a country’s external financial assets and liabilities, are “more often associated with emerging markets crises and were better predictors of output losses following the global financial crisis than gross debt levels.” The key is to see the need to borrow from abroad decline over time. “As an economy develops, its institutions strengthen and its financial system typically expands, leading gross debt to GDP ratios to increase. Moreover, as the domestic financial sector becomes more able to meet domestic demand for credit, the need to borrow from abroad declines, potentially causing net liabilities to decrease,” Goldman Sachs senior economist Kevin Daly argues.

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