Global Finance Fate Entangled in Web of Emerging World, BIS Says

  • Accumulation of foreign-currency denominated debt boosts risk
  • Developing markets have learned lessons from prior shocks: BIS

The world is increasingly at risk of being infected by turmoil starting in emerging economies given their rising clout in global trade and finance, according to the Bank for International Settlements.

Emerging-market non-bank borrowers that have accumulated $3.3 trillion in dollar debt are coming under strain as their economies slow and currencies weaken, the Basel-based BIS said in an annual report released Sunday. Those debts were built up during the era of cheap money that followed the 2009 financial crisis, and investors should take note now that this is drawing to a close, the BIS said.

“With growth in some emerging-market economies slowing and financial strains increasing, it is crucial to understand the extent to which these developments can spill over globally," said the BIS, which acts as a global forum for as many as 60 central banks. “The accumulation of a large stock of foreign currency-denominated debt in emerging-market economies has heightened the potential for spill-backs to advanced economies."

Emerging economies account for about 80 percent of the growth in global trade and output since 2008 and their investors are major holders of developed-country assets, including sovereign bonds. While most financial crises typically start in advanced nations before spilling over to the emerging world, the chances of the reverse happening are rising, according to the BIS, whose report was prepared before the U.K. voted to leave the European Union on Friday.

Rising Clout

Advanced economies have already seen examples of their financial markets being impacted by developments in less-developed peers. Selling by emerging-market investors lies behind movements in U.S. bonds over the past year while volatility on China’s equity markets has triggered turbulence far beyond the country’s borders, the BIS said.

Still, the organization said a financial upset starting in the developing world may not yet be imminent because emerging country governments learned from past crises to make their economies more resilient to external shocks, bolstering regulation and accumulating foreign-exchange reserves.

"Emerging-market economies’ foreign-currency debt as a share of GDP is smaller than it was before previous financial crisis," it said.

Even so, the amount of debt owed by companies in some developing countries has risen as profitability has declined, particularly in the commodities industry.

"Prudence is called for," the BIS said.