John Glover London
More than $2 trillion (R21 trillion) of foreign borrowing by emerging market companies since 2008 is leaving them vulnerable to a sudden drop in funding at the first sign of trouble, according to the Bank for International Settlements (BIS).
Bond investors willing to lend generously when conditions were good could pull out in a crisis or when central banks tightened monetary policy, analysts led by Claudio Borio, the head of the monetary and economic department, wrote in the BIS annual report. Emerging market companies that lost access to external debt markets might then be forced to withdraw bank deposits, depriving domestic lenders of funding as well, they said.
Low interest rates and central bank stimulus in developed nations, combined with a retreat in global bank lending, had encouraged emerging market borrowers to raise debt abroad, said the BIS, which hosts the Basel Committee on Banking Supervision that sets global capital standards. Demand for higher-yielding securities had helped suppress borrowing costs for riskier issuers.
“Like an elephant in a paddling pool, the huge size disparity between global investor portfolios and recipient markets can amplify distortions,” the analysts wrote. “It is far from reassuring that these flows have swelled on the back of an aggressive search for yield: strongly pro-cyclical, they surge and reverse as conditions and sentiment change.”
Average nominal yields on long-term bonds of emerging nations had fallen to 5 percent by May last year, from 8 percent at the beginning of 2005, the BIS said. Adjusted for inflation, this amounted to real long-term rates of just 1 percent last year, the co-ordinator of global central banks said.
Loose financing conditions “feed into the real economy, leading to excessive leverage in some sectors and overinvestment in the industries particularly in vogue, such as real estate”, the report said. “If a shock hits the economy, overextended households or firms often find themselves unable to service their debt.”
Emerging market firms sold bonds mainly through foreign units, exposing them to currency risk, it said. – Bloomberg