Vulnerability to foreign currency debt shifting in emerging markets: Moody’s

LONDON - Reuters

A push by emerging market countries over the last 15 years to borrow a smaller proportion of their debt in foreign currencies should make them less vulnerable to economic shocks, a new report from Moody’s said on Sept. 1.

The study by the ratings firm of 31 of the largest emerging markets showed that while the amount of debt had risen roughly 12 percent since 2000, economic growth had largely kept pace and almost 90 percent was now in their own currencies.

Coupled with the fact that almost 68 percent of all emerging market sovereign debt was now held by “resident” investors compared with 58 percent 15 years ago, Moody’s said it argued for “lower crisis susceptibility” for those economies.

“The associated decline of currency mismatches reduces the vulnerability of these countries to economic shocks and increases the effectiveness of monetary and fiscal policy.”

The situation isn’t black and white, however. Foreign investors have increased their participation in local currency markets which “may transmit global financial shocks” if they sell during times of tension.

Rise corporate debts in Turkey

Also the shift of sovereign debt to the domestic investor base could “deepen linkages” to other sectors of the economy like banks.

That was one of problems at the heart of the euro zone crisis when countries like Greece, Ireland, Portugal and Ireland got trapped in a vicious circle where their sovereign debt woes hammered their banks, which then in turn required bailouts.

And while governments may have cut their proportion of foreign currency debt, the opposite is true for companies.

Referencing a recent report from consultants McKinsey, Moody’s said that between 2007-14 debt-to-GDP ratios increased by 20 percentage points or more in the corporate sectors of China, Turkey, Hungary and Chile, and in the household sector in Thailand.