Emerging markets turn to local debt

Financial Times, Feb 14, 2018
by Jonathan Wheatley

Should investors worry about debt in emerging markets? The past week’s global market sell-off, and the rise in US interest rates that lies behind it, suggest they should at least keep a very close eye.

Our chart shows the total debts of 21 EM countries compiled by the Institute of International Finance, an industry association and data gatherer. It includes debts owed by governments, households, companies and the financial sector, in local and foreign currencies.

One of the selling points of EMs during the rally in their stocks and bonds over the past two years has been the improvement in their macroeconomic fundamentals. Dangerous current account deficits have largely been dealt with, the narrative goes, and the debt overhangs of the past have been reduced, thanks partly to a transition from foreign currency debts, which leave borrowers exposed to foreign exchange movements beyond their control, into local currency debts, which governments can do more about (such as inflating them away in times of difficulty).

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