In recent years, corporations in emerging markets (EM) have increasingly sought to tap international bond markets to finance themselves, as low interest rates at the global level have provided more attractive terms of borrowing than those corporations could access in their home countries. Jens Nordvig, global head of currency strategy at Nomura, estimates that EM corporations have issued $400 billion of offshore debt since 2010 — about 40% of total issuance (chart 1). This issuance is not captured in traditional country-level balance of payments statistics, which only measure debt issuance on a residency basis and not a nationality basis. In other words, the official statistics only measure a given corporations debt issuance in the home country, and dont take into account offshore debt issued through overseas subsidiaries. The latter measure is a better gauge of risk exposures, according to Philip Turner, deputy head of the monetary and economics department at the Bank for International Settlements, who argues in a new working paper that the consolidated balance sheet of an international firm best measures its vulnerabilities. This hidden debt, as Nordvig puts it, could pose a major risk for EMs in which currencies are rapidly declining against the dollar. Guess which two EM countries have issued the most offshore debt as a percentage of GDP? Number one is Russia, at 12% of GDP. Number two is Ukraine, at 9% (chart 2). In a recent IMF working paper, economists Kyuil Chung, Jong-Eun Lee, Elena Loukoianova, Hail Park, and Hyun Song Shin explained the danger posed to EM corporates by a rise in global interest rates, like the one weve seen over the last year (emphasis added): The practice of offshore issuance of debt securities by overseas subsidiaries of EM firms means that the standard external debt measures that are compiled on a residence basis may not fully reflect the true underlying vulnerabilities that are relevant for explaining behavior. If the overseas subsidiary of a company from an EM country has taken on U.S. dollar debt, but the company is holding domestic currency financial assets at its headquarters, then the company as a whole faces a currency mismatch and will be affected by currency movements between the funding currency and the domestic currency, even if no currency mismatch is captured in the official net external debt statistics. businessinsider/the-hidden-debts-of-russia-and-ukraine-2014-3
Posted on: Tue, 04 Mar 2014 22:50:03 +0000
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