The Bank for International Settlements (BIS) has released its December issue of the BIS Quarterly Review, giving its view on global financial markets and monetary policy. One of the review's special features covers issues affecting credit to emerging markets denominated in US dollar.
Looking at economy-level detail on US dollar debt incurred by borrowers in emerging economies, the authors Robert McCauley, Patrick McGuire and Vladyslav Sushko, all from the BIS, give details of such debt for 12 prominent economies that account for the bulk of total US dollar debt owed by emerging markets.
Dollar credit to non-banks outside the United States reached $9.8 trillion at the end of Q2 2015.
The authors in particular asked why companies (and some households) outside the United States borrow in US dollars.
The authors say that in part this is accounted for by the prominent role of the US dollar in global trade and investment, as well as the need to hedge the currency exposures that arise from these activities. However, while companies borrow in dollar because they engage in international dollar-invoiced trade, this accounts for only $2.7 trillion, according to the authors. This is significantly less than the $9.8 trillion quoted above.
Other motivations include:
- attempts to profit from interest rate and currency movements, although this incurs FX risks;
- funding of inventory and fixed assets at home;
- accessing lower interest rates and longer maturities;
- foreign direct investment; and
- the accumulation of financial assets, including those in the domestic currency.
The article notes that the combination of debt in the US dollar and a long position in domestic currency (a form of 'carry trade') is difficult to document, given the opacity of corporate reporting.
Net issuance of US dollar bonds by emerging market non-banks
As shown in the graph below, following the market turbulence in many emerging market economies in August 2015, there was a steep drop in net issuance of US dollar bonds by the 12 most prominent emerging markets. It declined from $41 billion in Q2 to $5 billion in Q3. BIS's authors state that, “but for five of the 12 EMEs that we study here, net dollar bond issuance by non-banks turned negative in Q3 2015.”
The BIS December 2015 Quarterly Review is available here.
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