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Wednesday, 27 November 2019

Emerging markets’ FX funding needs to repay USD-denominated debt to “soar” next year

Emerging markets’ FX funding needs to repay a decade of USD-denominated debt are on track to “soar” next year, Caroline Grady writes for the Financial Times. EMs have racked up significant debts since the 2008 global financial crisis, and are scheduled to repay nearly USD 800 bn-worth of debt on foreign currency bonds and loans in 2020. The “wall of USD debt” EM countries are expected to begin repaying will undermine the positive impact of narrowing current account deficits in many of these countries, such as Turkey and Argentina. “The result: lingering currency vulnerabilities in a number of economies and reliance on ample investor appetite for EM debt,” Grady says.

This is not the first time for someone to ring the alarm on emerging markets’ rising USD-denominated debt burdens: Fitch Solutions had warned in a webinar we attended last month that EMs’ borrowing binge since the 2008 global financial crisis has created an “Achilles heel” in the form of USD-denominated debt exposure. The IMF said shortly thereafter that EM state-owned enterprises in particular are also facing a “concerning” rise in their debt burdens, which currently account for a “significant portion” of all EM debt securities.

It’s not all doom and gloom, though — expectations of a USD rally slipped last week to a five-month low, buoying investor sentiment on emerging markets, according to Bloomberg. Bond purchases in developing countries helped keep portfolio flows positive for a sixth consecutive week last week, while the MSCI index of developing countries’ currencies began picking up on hopes of a US-China trade agreement. A weaker USD should help alleviate EMs’ debt burdens, but it remains unclear to what extent.

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