Worries are growing that the current slump in emerging market currencies has turned the record $3tn of dollar-denominated debt amassed by companies and banks into a ticking time bomb.

Reuters
London


Worries are growing that the current slump in emerging market currencies has turned the record $3tn of dollar-denominated debt amassed by companies and banks into a ticking time bomb.
A delay in US rate increases seems to have stalled the dollar for now. But the International Monetary Fund last week became the latest to warn that a quadrupling of EM corporate debt over the last decade needs careful watching.
Companies in developing economies had almost $930bn in dollar bonds and $1.5tn to 2tn in bank loans at last count, according to the Bank for International Settlements. EM banks had another $700bn in their own dollar bonds.
Much of that has been driven by bargain borrowing costs after the financial crisis. But the plunge in EM currencies – more than 40% for Brazil and Russia over the last 12 months and 20 to 30% for Malaysia, Turkey, South Africa and Mexico – is now looking ominous.
Every fall in an EM currency makes the cost of paying back any dollar debt that hasn’t been “adequately hedged” as the IMF’s financial stability report said last week, more expensive.
Standard and Poor’s estimates the EM companies whose credit it rates must repay or refinance roughly $225bn of dollar debt by the end of 2017 and $500bn by the end of 2020.
Neither the BIS, the IMF nor the rating agencies have data on how much of that debt is hedged. But for any that isn’t, the effective 20 to 40% rise in its cost may be too much for many companies to cope with.
“It is definitely an area of vulnerability and one which markets will likely start paying more attention to,” said Manik Narain, emerging market strategist at UBS in London. “Many are heavily exposed to the fall in local currencies and with growth and exports slowing it implies there are growing FX mismatches.” In Brazil, which is deep in political crisis and has just been stripped of its investment-grade rating by S&P, corporate borrowers owe over $300bn in dollar debt, almost a fifth of the country’s gross domestic product, BIS figures show.
China keeps a tighter grip on the yuan, so it hasn’t seen the same kind of currency drama. But its companies and banks have ramped up dollar bond issuance almost 12-fold to $311bn since 2010 and now have a combined $1.1tn of US currency debt.
Elsewhere, Turkish banks have almost $40bn of dollar debt compared with just $6bn five years ago. Mexican companies have more than doubled theirs to almost $100bn. Chile, Thailand, India and Indonesia have also seen big increases.  
The underlying fear is that a wave of EM corporate defaults would feed up to countries’ governments and cause the type of crises that hit Latin America and Asia in the 1980s and ‘90s.
Many countries have been trying to reduce their reliance on dollar debt by issuing more bonds in their own currencies in recent years. But much of that work could be undone if a blizzard of defaults cripples banks, who then require bailouts.
There are also the more direct links of the dollar debt of state-owned or partly state-owned firms, especially in China and Latin America and the oil and mining companies now being battered by a slump in global commodity prices.
“The upward trend (in EM corporate debt) in recent years naturally raises concerns because many emerging market financial crises have been preceded by rapid leverage growth,” the IMF warned.
Historically, few state-linked company defaults have not also led to a government also going under, however, and some EM traders think too much generalisation is currently going on.