EM foreign currency debt below 20-year average
Foreign currency debt in emerging markets (EM) is below its 20-year average in a majority of countries covered by a report from Nomura Securities.
External vulnerability in EM has been discussed widely since April last year when the most recent episode of EM volatility began.
However, current levels of hard currency external debt (bonded debt and bank loans) in EM nations are not high from a historical perspective, said Nomura. "In fact, for the majority of the EM countries in our sample, the hard-currency debt exposures are below the average of the last 20 years."
There are a few exceptions to this pattern and they include Ukraine, Taiwan, and the Czech Republic. And for a couple of EM countries, traditional vulnerability metrics, such as FX debt relative to FX reserves, are "flashing red," Nomura said. This group includes Argentina, Venezuela and Ukraine, where the ratio of FX debt relative to FX reserves are at 4.8, 4.0 and 2.6, respectively.
However, the problem for these nations is more a function of low reserve levels and weak economic growth than a result of excessive debt accumulation in itself, the Nomura analysts noted.
There has indeed been a significant increase in EM during the last several years in terms of foreign currency-denominated corporate debt issuance: from an estimated US$597bn at end-2009 to US$1.30tn at the end of last year (including offshore issuance). This has not, however, led to a broad-based increase in FX debt at the macro level and in many EM countries the overall level of FX debt as percentage of GDP has actually gone down, the analysts said.
One important part of the explanation for this trend is that sovereign debt issuance has tended to be concentrated in local currency, and government foreign currency debt has grown more slowly than GDP, said Nomura. And this conclusion holds even when including "hidden" debt (that is, debt issued offshore), which is not necessarily included in traditional residency-based external debt statistics from official sources, the investment bank added.
Several EM countries are today experiencing slower growth, and a weaker currency may be a "natural component" of the adjustment process. However, the Nomura analysts said they do not generally view the size of FX debts in emerging markets as sufficiently large to create a negative feedback loop from currency weakness into increased debt burden and weak growth.
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