Emerging markets are suffering a double-whammy: The strong dollar is making their dollar-based debt more and more expensive and investors are fleeing.
Many developing countries got wooed into borrowing in dollars as the Federal Reserve pursued its zero interest rate policy.
Emerging market corporate debt has grown from $5.8 trillion in 2009 to $7.8 trillion today; about 18%, or $1.3 trillion, is in U.S. dollars and other foreign currencies, says Jan Dehn, head of research at Ashmore Investment Management.
Chinese companies began grabbing U.S. dollar denominated debt around 2010, reports the Wall Street Journal. At the time, the yuan was appreciating, making it easy to pay off foreign currency debt. Property developers hold a large chunk of the debt, $62.5 billion in dollar bonds. Many were betting on the yuan as it rose. In all, Chinese companies have $367.7 billion in outstanding U.S. dollar debt, reports Dealogic.
Other countries followed in the borrow dollars at cheap rates.
Mexico holds $10. 1 billion in U.S. dollar debt, compared to $5.87 billion in peso debt and $3.3 billion in other currencies, reports Dealogic. Malaysia holds almost $5 billion in U.S. dollar debt, compared with nearly $4 million in the Ringgit. The Ringgit has gotten pummeled.
“I never expected the yuan to fall off the cliff like this in such a short period of time,” said Antonio Huang, a commodity coke middleman, in The Wall Street Journal. “This huge volatility is really bad for conducting normal business activities.” The yuan’s fall hit companies with at least $11 billion in currency-exchange losses.
No surprise that emerging market local bond funds are suffering a surge of outflows, bleeding about $1.3 billion between January and July this year. Emerging market hard-currency debt bonds saw much smaller outflows — only $263 million during the same period. Some analysts say it’s for the best to have the biggest portion of local currency debt held in-country, to reduce vulnerability to nervous foreign investors.
Photo: stratman2