The first half of 2018 was characterised by difficult conditions for the emerging markets. Even if it is not always possible to clearly distinguish between cause and effect, one reason for the scepticism was the strengthening of the US dollar relative to many emerging market currencies, which then essentially makes servicing the debt held in US dollars more expensive. The updated data released this week by the Bank for International Settlements (BIS) on US dollar debt held by countries outside the USA (non-banking sectors) provides interesting insights in this regard.
According to the data, US dollar debts held by the emerging markets has risen from Q1 2017 to Q1 2018 by USD 292 billion to USD 3.68 trillion, meaning that the upward trend seen in recent years has persisted. Moreover, it is not just in the emerging markets that debt held in US dollars has increased, although the rate there of 8.9% was somewhat faster than that for US dollar-denominated debt as a whole (+ 7%). The driving force behind this climb was US debt held in the form of bonds, which grew at 16.4% and thus far quicker than US bank loans, which edged up 3.8%. In terms of regional spread, the lion’s share of the debt went to Asia (almost 40%), followed by Latin America (28%). East Europe placed third, but carries by far the highest figure for forex debt held in euros, so that east Europe would move closer to Latin America if the calculation included USD and euros. Of the (few) countries for which data is provided, in absolute terms China is the greatest USD debtor and the predominant one in Asia, accounting for 39% of the total there. In east Europe, Turkey holds the most significant slice of USD-denominated debt (42%); in Latin America that role falls to Mexico, with 27%.
An analysis relative to GDP and foreign exchange reserves sheds more light on the rise in USD indebtedness. Three countries need to be emphasised in critical terms: Chile, Argentina and Turkey. Chile has the highest USD-denominated debt relative to GDP. Of the three, the country is somewhat of an exception, however, as thanks to its copper exports Chile has a high volume of export revenue that is invoiced in US dollars and owing to the good country rating enjoys more advantageous access to the capital markets. Moreover, compared to Argentina or Turkey, Chile has to finance a far lower current account deficit and has a lower proportion of short-term foreign debt. As regards external liquidity, we believe Turkey and Argentina are in general in a weaker position. The single largest portion of Turkey’s debt is denominated in euros. Were this position to be factored into the equation, then the data for the country would be even dimmer. Argentina’s USD-denominated debt is largely held by the government and the country distinguishes itself by the fact that, according to the BIS, the increase in USD debt has had the highest momentum in recent years.