BIS report: emerging markets exposed to external shocks due to higher debt

BIS report: emerging markets exposed to external shocks due to higher debt

20/09/2016 source “Financiero”

In its annual report, the Bank for International Settlements (Bank for International Settlements – BIS) warned of the fact that emerging market debt issuers are exposing their currencies to greater volatility by allowing financing funds (the loans in Dollars) exceed the value of their reserves.

The BIS, based in the Swiss city of Basel, act as a global forum for 60 central banks. Its mission is to serve central banks in pursuit of monetary and financial stability, promote international cooperation in these areas and act as a bank for central banks.

In that report, published last Saturday, the BIS states that companies in developing markets, including the state owned companies, accumulated 3,2 billion Dollars of debt.

“In many cases, the growing foreign currency debt was not matched by assets and income in foreign currency,” reports the report of the BIS. “There is a great risk that the ups and downs of capital flows cause large changes in exchange rates”.

Emerging economies that have important support of foreign investors are very exposed to sudden mood changes and to the exit of the money markets.

The Templeton Global Bond Fund, one of the largest investors in the world’s emerging markets, led an exodus from Poland in the first half by reducing the fund’s holdings of 44 billion Dollars to get an equivalent to 3,6% of its investments portfolio in the end of June, from the 7,4% with which ended the third quarter 2015.

On the other hand, the BIS also state that the banks that lend to emerging markets also reassess their investments when the depreciation of the local currency creates higher debts.

Emerging economies, which account for about 80% of the growth of world trade and production since 2008, saw, regarding exports, the ratio of debt in Dollars achieve a maximum level of 49% at the close of last year, of the 30% observed in the previous nine years.

The report also stated that the obligations in Dollars also increased regarding the amount of official foreign exchange reserves.