Bundles of Indonesian 100,000 rupiah banknotes and 50,000 rupiah banknotes are seen on a desk at a currency exchange office in Jakarta. The rupiah has led the emerging market assets’ rally, gaining 8% this month, followed by the Colombian peso’s 7% advance.

New York

Borrowers in emerging markets have started to address a $5tn mountain of dollar-denominated bonds and loans, reducing their obligations for the first time in seven years in a move that threatens to cut short a budding rally in currencies from Brazil to Malaysia.
Companies in developing nations paid back $38bn of dollar debt last quarter, $3bn more than they borrowed in the period and marking the first reduction in net issuance since 2008, according to data compiled by Bloomberg.
Demand for greenbacks among borrowers needing the currency to repay debt is contributing to the largest capital outflows in almost three decades.
The borrowing binge, which took off in the wake of the global financial crisis as interest rates tumbled, may now be reversing as economic growth slows, commodity prices fall and lenders demand higher yields.
While developing-nation currencies are rebounding from their record lows, analysts surveyed by Bloomberg expect the depreciation trend to resume as dollar debt repayments accelerate.
“This is a massive event,” said Stephen Jen, the co-founder of London-based hedge fund SLJ Macro Partners and a former economist at the International Monetary Fund whose bearish call on emerging markets since 2012 has proven prescient. “They want to pay down their dollar loans. We are early in the game, there’s pretty intense pressure on emerging markets.”
After falling for most of this year, emerging-market assets have gotten a respite in recent weeks as weaker-than-forecast economic data fuels speculation that the Federal Reserve may postpone until next year its first interest rate increase since 2006.
The Indonesian rupiah has led the rally, gaining 8% this month, followed by the Colombian peso’s 7% advance. A Bloomberg gauge of emerging-market currencies fell 0.4% in New York, trimming its advance to 4.6% since September 28 when it reached an all-time low.
Most analysts remain bearish. All of the 23 major emerging- market currencies will weaken against the dollar by the third quarter of next year, with the Hungarian forint and Russian ruble declining more than 10%, according to strategists surveyed by Bloomberg.
Foreign banks have pared their lending to developing nations since mid-2014, with the amount of loans on their books shrinking by $299bn to $3.4tn in the nine months ended March 31, according to data by Bank for International Settlements.
In the $1.4tn corporate debt market, new bond sales dropped to a four-year low of $35bn last quarter, from a peak of $121bn in June 2014, data compiled by Bloomberg show.
“When growth deteriorates, investment opportunities are naturally lower, therefore money leaves, either to repay debt or buy alternative investments elsewhere,” said Koon Chow, a strategist at Union Bancaire Privee in London and former head of emerging-market strategy at Barclays Capital. “There’s a good chance that the deleveraging does continue because on the commodity side, the reduction in capex is going to be long term.”
Commodity producers account for about 30% of the dollar debt, the second-biggest borrower after financial firms, Bloomberg compiled data show.
The debt repayments have only played a marginal role in boosting the dollar and may not persist, according to Yacov Arnopolin, a portfolio manager who helps oversee about $36bn in emerging-market debt at Goldman Sachs Asset Management in New York.
There is “an element of forced deleveraging here,” but “it’s too early to call it a trend,” he said.
Some companies including GMK Norilsk Nickel, Russia’s biggest mining company, and Turkey’s largest mobile operator, known as Turkcell, have returned to the debt market this month after weakness in the dollar helped lower emerging-market borrowing costs from a four-year high.
In Brazil, the redemptions are contributing to capital outflows. At least three small and medium-sized Brazilian banks, including Banco do Estado do Rio Grande do Sul and Banco BMG, have offered to buy back their overseas bonds in the past month amid a selloff in developing-market assets. The Institute of International Finance forecast on October 1 that about $540bn will leave emerging markets this year, the first net capital outflow since 1988.
The unwinding of dollar borrowings is more than a fleeting phenomenon, which will contribute to the weakening of emerging- market currencies against the US currency, according to Pierre Lapointe, the Montreal-based head of global strategy and research at Pavilion Global Markets.
The Fed’s broad measure of the dollar against major US trading partners has rallied 16% since the middle of 2014 and reached a 12-year high last month.
“We expect the theme of EM external deleveraging to remain with us for a long time,” Lapointe said in a note on October 9. “Historically, this process tends to last many years. In this context, we are probably halfway throughout the current structural dollar uptrend.”

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