EM Debt in Peril of Any Fed Tight­en­ing, says MS

Big shifts in US in­ter­est rates, dol­lar bring mas­sive risk

The Economic Times - - Money -

New York: Pol­icy mak­ers in emerg­ing mar­kets should be hop­ing the Fed­eral Re­serve con­tin­ues on its path of grad­ual in­ter­est-rate rises as some are ex­posed to any sharp in­creases in the US, ac­cord­ing to Mor­gan Stan­ley.

The ex­po­sure is a re­sult of sub­stan­tial ex­ter­nal debt link­ages. Most emerg­ing-mar­ke­tex­ter­naldebt—20 per­cent of gross do­mes­tic prod­uct — is de­nom­i­nated in a for­eign cur­rency, with the largest com­po­nent be­ing cor­po­rate debt in US dol­lars.

Over­all for­eign cur­rency debt in the emerg­ing mar­kets ex­clud­ing China rose from 22% of GDP in 2011 to 30% in the first quar­ter of this year. Most of the in­crease com­prises longer-term obli­ga­tions, with the level of short-term loans re­main­ing rel­a­tively low at 8%of GDP.

“While this means that EMs will be bet­ter pro­tected from short-term FX volatil­ity, they re­main ex­posed to big shifts in USD and US rates,” Mor­gan Stan­ley econ­o­mists, led by Chetan Ahya, wrote in a note. “Be­sides for­eign cur­rency debt, ex­po­sure to US rates comes via large for­eign hold­ings in lo­cal gov­ern­ment bonds.”

Coun­tries where there are risks as­so­ci­ated with the rise in for­eign cur- rency debt in­clude Chile, Malaysia, Brazil, Turkey and Mex­ico, while South Africa, Colom­bia and In­done­sia are ex­posed to for­eign own­er­ship of lo­cal gov­ern­ment bonds.

Over­all EM debt has risen sharply since the global fi­nan­cial cri­sis, led by China where the debt-to-GDP ra­tio rose from 143% in 2007 to an es­ti­mated 280%in the first quar­ter of this year. The ra­tio in de­vel­op­ing na­tions ex­clud­ing China climbed from 107%to 130%over the same pe­riod. The an­a­lysts said the sit­u­a­tion is man­age­able, and the re­cent rise in nom­i­nal GDP growth has helped to sta­bi­lize the ra­tio.

The high lev­els of debt in China have caused con­cern, but Mor­gan Stan­ley­saidthe­dy­nam­ic­s­there­have been im­prov­ing as a re­sult of lower de­fla­tion­ary pres­sures and pol­icy re­forms. The in­crease in China has been driven solely by do­mes­tic debt.

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