Worries are growing that the corporate sector in major emerging markets is lurching ever closer to a 1990s-style solvency crunch, after amassing big debts in foreign currency.
“It’s the original sin in economic and
financial markets,” said Marios Marath-eftis, global chief economist at Standard Chartered.
Emerging market currencies, especially the Turkish lira, Indonesian rupiah and Brazilian real were more likely to fall than rise as a US interest rate hike approached, he said — meaning risks could soon come to a head.
Since 2008 emerging market corporate debt has increased by 30% of GDP to around 90%, or $23.7tr, 18% of which is in foreign currency (mainly dollars), according to Hung Tran, executive managing director of the IIF.
“If the dollar strengthens against local currencies then the service of that debt will be much more onerous and more painful for borrowers,” he told Emerging Markets. “At the same time, borrowers are under pressure because emerging market growth is going down, corporate earnings are going down, and both are correlated with the downturn in world trade and commodity prices.”
That would mean, he said, “more inst-ances of corporate distress and a rise in non-performing loans, to the extent that banks lend to emerging market corporations.”
“On the corporate side, the accumulation of dollar debt, simply because it is there and available, can be a recipe for difficulty and it is likely that we will see casualties,” said Paul Tregidgo, vice-chairman of debt capital markets at Credit Suisse.
Maratheftis said the combined risks in local and foreign currency corporate debt were greatest in Turkey, proportionately to its economy.
While there are no reliable data on the maturity of Turkish businesses’ foreign currency debt, he said Standard Chartered’s best estimate was that it was mainly short term, because much of it was likely to belong to construction firms, which usually use working capital.
SACRIFICING GROWTH FOR STABILITY
Companies in Indonesia have also been indulging in original sin, according to Maratheftis. He said Indonesia had followed a “textbook” approach, raising rates and consolidating the fiscal account, since fears around emerging markets began to rise two years ago.
“They were willing to sacrifice growth for stability,” he said. Higher local interest rates, however, have pushed firms to borrow more in dollars — though with a fairly long maturity profile.
Jennifer Gorgoll, portfolio manager for emerging market corporate bonds at Neuberger Berman, said investors had to look at the specifics of emerging market corporate borrowers.
“There are several bond issuers [in Brazil] that have most of their revenues in US dollars, while their costs are in reais,” she said. “Obviously those that operate mainly domestic markets are causing concerns, and there are some stressed situations, but in most cases we are not questioning the viability of these companies.”
Malaysia’s deputy finance minister Johari Abdul Ghani, previously managing director of consumer products group CI Holdings, said around 5% of his country’s government debt was foreign currency, but that was around 35% for companies.
He added, though, that this was balanced by overseas investments. “We don’t see much trouble in the corporates,” he said.
Abdul Ghani said the government was encouraging state companies and funds to sell foreign assets or slow overseas investments after a 26% drop in the ringgit this year.
“They [state-owned entities] have to stop taking ringgit out,” he said. “We encouraged them to slow down their investments. We are not going to impose capital controls or a peg on the currency.”