Debt Mismatch Leaves Emerging Nations Exposed to Shock, BIS Says

  • State-owned companies helped push net debt sales to 2Q record
  • Fickle foreign investor sentiment leaves borrowers exposed

Emerging-market issuers are exposing themselves to greater currency volatility by letting dollar borrowings outstrip their buffer of reserves, according to the Bank for International Settlements.

Developing-nation companies including state-owned enterprises have accumulated $3.2 trillion of dollar debt, the Basel-based BIS said in an annual report released Sunday.

“In many cases, rising foreign currency debt has not been matched with FX assets and revenues,” according to the report by the BIS, which acts as a global forum for as many as 60 central banks. “There is a great risk that booms and busts in capital flows will cause large shifts in exchange rates.”

Leaning on foreign investors so heavily exposes emerging economies to rapid shifts in sentiment and currency markets. Templeton Global Bond Fund, one of the world’s biggest emerging-market investors, led an exodus from Poland in the first half as it scaled back holdings in the $44 billion fund to 3.6 percent at the end of June from 7.4 percent at the end of the third quarter of 2015. Banks that lend to emerging markets also re-evaluate allocations when local currency depreciation creates bigger debts, according to the BIS.

Emerging economies, which account for about 80 percent of the growth in global trade and output since 2008, have seen the ratio of dollar debt to exports rise over the period to 49 percent at the end of last year from 30 percent. Dollar liabilities have also increased relative to the stock of official foreign currency reserves, the BIS said.

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