Fed Triggers Bank Flight From Emerging Markets
As the Federal Reserve gradually ends its extraordinary efforts to stimulate the U.S. economy, there is increasing concern about the potential for repercussions in faraway places -- particularly in emerging markets. To judge from the recent behavior of global banks, those repercussions are already happening.
Since the 2008 financial crisis, emerging markets have been on a credit binge, fueled by extremely low U.S. interest rates that sent lenders looking farther afield for better returns. Over the six years through September 2014, private credit to the non-financial sectors of major developing countries almost tripled, to $4.3 trillion, according to the Bank for International Settlements.
Now the winds are shifting. The Fed is moving toward raising rates, and developing-nation borrowers appear less able to handle all their debt, a large chunk of which is denominated in increasingly expensive dollars (the U.S. currency's trade-weighted exchange rate has risen 13 percent since mid-2014). Hence the worry: Might investors start pulling money out, exacerbating the debt problem and possibly triggering a larger crisis?
Actually, they already are taking money out. According to new estimates from the BIS, the outstanding stock of cross-border lending into developing nations decreased by about $80 billion in the last three months of 2014 -- the largest quarterly withdrawal in more than five years. Here's how that looks:
The outflow from China, at $51 billion, was the largest in nominal terms, followed by Russia, with $19 billion. Measured as a share of gross domestic product, cross-border lending declined the most in Malaysia, followed by Angola (among developing economies with at least $100 million in 2014 GDP).
To be sure, the banks' moves aren’t necessarily the beginning of a destabilizing exodus. The changing outlook for interest rates, which makes the U.S. more attractive, justifies a shift in lending flows in any case. What happens next will depend on how deftly the Fed does its job, how well emerging-market borrowers handle their debt burdens, how skittish or overextended global investors prove to be -- and, perhaps, how ably regulators can identify and mitigate the risk of contagion.
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