Developing world eases growing debt risks
Less foreign borrowing, longer bonds offset possibility of economic crisis: BIS
A large-scale shift toward domestically issued and longerdated bonds in emerging markets has helped build resilience to external shocks despite the increase in overall debt levels, the Bank for International Settlements (BIS) said.
The BIS, an umbrella body for global central banks, has warned in the past that developing world risks were entering a new crisis because of a buildup in debt levels. But its latest report found that changes in the composition of debt were a mitigating factor.
“Borrowing is mostly done in local currencies, at longer maturities and at fixed rates. Taken together, these trends should help strengthen public finance sustainability by reducing currency mismatches and rollover risks,” the BIS wrote.
Its quarterly report said emerging market government debt stood at $11.1 trillion, having doubled since end-2007.
But only 14 percent of the outstanding debt of 23 of the big developing countries was in foreign currency, its data showed, down from 32 percent at the end of 2001.
While foreign borrowing still made up about one-third of the total in some countries such as Saudi Arabia, Turkey and Poland, such issuance has broadly declined.
“The fall in the share of FXlinked debt in the early-2000s may have helped shield emerging economies from the global market turbulence of the 200709 crisis and its aftermath,” the study noted.
The BIS also noted that bond tenors had risen steadily across emerging markets, with an average maturity of 7.7 years for its sample set of 23 countries. This is only slightly below the average of eight years in developed countries.
This is not entirely without risk, however, the BIS warned.
Longer maturities mean higher global bond yields – possibly as developed nations exit years of super-easy credit policies – “could have a greater impact than previously on the market value of debt, potentially increasing rollover risks and other adverse feedback mechanisms,” the report said.
That is because interest rate rises tend to fuel a bigger drop in the price of longer-dated bonds than in those with shorter maturities.