Transcript The long-term interest rate, central bank balance

A new dimension of currency mismatches
in EMEs
Michael Chui
Bank for International Settlements
Global debt dynamics initiative: Inaugural workshop
26th May 2016
[email protected]
These slides were prepared on the basis of joint work with Emese Kuruc and Philip Turner.
Many thanks for help producing this presentation to Jhuvesh Sobrun and José Maria Vidal Pastor.
This presentation reflects my views, not necessarily those of the BIS.
Summary
2003–12: an extraordinary decade of EM-led growth due to:
 Radical EM policy reforms in the 1990s
 From 2008, advanced economy central banks boost global
liquidity
The Governor of the Banco de México:
“massive capital inflows into EMEs … fuelled primarily by carry trades …
[given] ex ante covered interest rates arbitrage … which in turn
generated … meaningful real exchange rate appreciations”
(Carstens (2015))
2
Recent dynamics of capital flows to EMEs
and
debt sustainability
3
Strong financial inflows to EMEs come with large
reserves accumulation
Balance of payments of major emerging economies1
In billions of US dollars
Major EMEs (excl China)1
Graph 1
China
1
Argentina, Brazil, Chile, Czech Republic, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, the Philippines, Poland, South Africa,
Russia, Thailand and Turkey.
Source: IMF.
4
Portfolio investment and banking inflows have picked
up since 2009
Net financial flows of major emerging market economies1
Graph 2
In billions of US dollars
Major EMEs (excl China)
China
1
Argentina, Brazil, Chile, Czech Republic, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, the Philippines, Poland, South Africa,
Russia, Thailand and Turkey.
Source: IMF.
5
External debts of private sector have grown across
most emerging market economies
Net external assets of major emerging economies1
In trillions of US dollars; at end of year
Major EMEs (excl China)
Graph 3
China
1
Argentina, Brazil, Chile, Czech Republic, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, the Philippines, Poland, South Africa,
Russia, Thailand and Turkey. Owing to data availability, net public international investment positions for China is calculated as the difference
between reserve assets and SDR allocations at the IMF. Data shown for 2015 refer to latest available data.
Source: IMF.
6
Global growth led by EMEs (excluding China), but that
has come to a halt
Real GDP growth and growth differential1
In percent
Regional growth
Graph 4
EM vis-à-vis AE growth differential
1
Regional aggregates are calculated as 2010 GDP-PPP weighted averages. 2 Canada, the euro area, Japan, the United Kingdom and the
United States. 3 Argentina, Brazil, Chile, Czech Republic, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, the Philippines, Poland,
South Africa, Russia, Thailand and Turkey.
Source: IMF.
7
Corporate debts and currency mismatches
8
Non-bank financial corporations turn to capital
markets
EME private cross-border bank borrowing and international debt issuance1
In billions of US dollars
Annual changes2
Graph 5
Outstanding amounts
1
Private non-bank sector. Cross-border bank borrowing (by residence) also includes claims on the household sector and claims on portfolio debt
investment (implying a degree of double-counting), while international debt issuance (by nationality) includes securities issued by non-bank financials
and non-financial corporations; and these securities could be denominated in local or foreign currency. 2 Based on end-of-year data; for 2015, based
on data up to Q3 for cross-border bank borrowing.
Source: BIS consolidated banking statistics and international debt securities statistics.
9
Corporate cross-border flows require special attention
Residence concept
Domestic
firms
offshore
Border
Foreign currency debts, assets and income of
residents – including
Foreignowned
firms
vis à vis non-residents (external)
and vis à vis other residents (internal)
Nationality concept
ADD
= Affiliates of local firms based overseas (excluded
SUBTRACT
= Foreign-owned firms operating in the domestic
market (included in export earnings and resident
debt)
from export earnings and resident debt)
10
Overseas subsidiaries responsible for almost half of the
total issuance
EME corporations: international bond issuance
In billions of US dollars
Brazil
Graph 6
China
India
Source: BIS international debt securities statistics.
11
It is possible to track some corporate financial flows
using balance-of-payments data
Nonfinancial corporations and capital flows
Graph 7
FDI debt
Trade credit
Loans
Currency and
deposits
Source: BIS.
12
EME corporate debt stocks grow rapidly
Non-financial debt of EMEs
As a percentage of nominal GDP
Non-financial private sector debt1
Graph 8
Non-financial private sector debt
Non-financial corporate debt2
1
Weighted average by GDP. The advanced economies include Australia, Canada, Denmark, the euro area, Japan, Norway, Sweden,
Switzerland, the United Kingdom and the United States. The emerging economies include Argentina, Brazil, China, Hong Kong, Hungary, India,
Indonesia, Korea, Mexico, Malaysia, Poland, Russia, Saudi Arabia, Singapore, South Africa, Thailand and Turkey. 2 The advanced economies is
nominal GDP- weighted average of Australia, Canada, the euro area, Japan, Sweden, Switzerland, the United Kingdom and the United States.
The emerging economies is a nominal GDP-weighted average of Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Poland, Russia,
Saudi Arabia, South Africa and Turkey.
Source: IMF, World Economic Outlook; BIS data on total credit to non-financial corporations and to non-financial private sector.
13
Aggregate effective currency mismatch measures:
1.
Foreign currency share of total debt
% of total debts in foreign currency (FC%TD) scaled by the share of
tradables in GDP (proxied by X/GDP)
=
2.
𝐹𝐶%𝑇𝐷
𝑋/𝐺𝐷𝑃
Modified foreign currency share of total debt (ie, taking into
consideration a country’s net foreign currency position (NFCA)
=
𝑁𝐹𝐶𝐴
𝐺𝐷𝑃
×
𝐹𝐶%𝑇𝐷
𝑋/𝐺𝐷𝑃
14
Simple aggregate measure suggests
improvement
Foreign currency debt as a percentage of total debt1
In percentages
Graph 9
Latin America2
Asia, larger economies3
Other Asia4
Other emerging market economies5
1
Update of Table 4.4 (and the final column of Table 4.5) of Controlling currency mismatches in emerging markets, Goldstein and Turner (2004).
Outstanding positions of year-end, calculated with aggregates of the economies listed in footnotes 2-5. 2 Brazil, Chile, Colombia, Mexico
and Peru. 3 China, Chinese Taipei, India and Korea. 4 Indonesia, Malaysia, the Philippines and Thailand. 5 Bulgaria, the Czech Republic,
Estonia, Hungary, Israel, Latvia, Lithuania, Poland, Romania, Russia, South Africa and Turkey.
Sources: IMF; CEIC; BIS; national data; BIS calculations.
15
Augmented measure indicates similar trend
Net foreign currency assets as a percentage of exports1
In percentages
Graph 10
Latin America2
Asia, larger economies3
Other Asia4
Other emerging market economies5
1
For net foreign currency assets, outstanding positions of year-end. Calculated with aggregates of the economies listed in footnotes 25. 2 Brazil, Chile, Colombia, Mexico and Peru. 3 China, Chinese Taipei, India and Korea. 4 Indonesia, Malaysia, the Philippines and
Thailand. 5 Bulgaria, the Czech Republic, Estonia, Hungary, Israel, Latvia, Lithuania, Poland, Romania, Russia, South Africa and Turkey.
Sources: Datastream; IMF; BIS; national data; BIS calculations.
16
Micro-analysis: through a sample of 280 companies with
“tradable” international bond issues
17
Corporates’ foreign-currency bond issuance has risen
sharply since the crisis
Gross debt issuance by EME non-financial corporations
In billions of US dollars
Full sample
Graph 11
Tradable sectors
Non-tradable sectors
Source: Thomson Reuters Eikon.
18
Corporates’ foreign-currency bond issuance has risen
sharply since the crisis
Currency shares of EME non-financial international bond issuance
between 2006 and 2014
In percent
Tradables
Graph 12
Nontradables
The sectors are as follows: Diversified/conglomerates, industrial, metals & mining, oil & energy, pulp & paper, and transport/airlines, Nontradables: consumer, infrastructure, real estate (REE), telecommunications (TMT) and utilities.
Source: Thomson Reuters Eikon.
19
Vulnerabilities are rising
Leverage of EME non-financial companies – total debt to equity1
In per cent
Full sample
Graph 13
Tradable sectors
Non-tradable sectors
1
A sample of 280 companies which have issued international bonds. Tradables: Diversified (conglomerates), industrial, metals & mining, oil
& energy, pulp & paper and transport (airlines); non-tradables: consumer, infrastructure, real estate, telecommunications and utilities.
Source: S&P Capital IQ.
20
Profitability of non-financial companies is declining
Return on equity of non-financial companies in EMs
Tradables
Nontradables
Table 1
2010/11
2011/12
2012/13
2013/14
2014/15
25th percentile
11.1
7.0
6.0
5.1
0.7
Median
16.6
12.8
12.6
11.4
7.3
75th percentile
26.2
19.9
18.9
17.4
13.9
25th percentile
13.9
4.9
4.3
3.3
-5.4
Median
19.2
11.9
8.9
8.5
2.9
75th percentile
27.0
21.5
16.2
14.9
9.8
25th percentile
9.5
8.1
6.7
5.4
4.4
Median
16.0
13.0
13.8
12.5
9.9
75th percentile
24.8
19.7
20.9
18.7
16.5
Source: A sample of 280 companies which have issued international bonds; S&P Capital IQ.
21
Debt-servicing capacity is relatively stable, but …
The interest coverage ratio of non-financial companies in the EMEs
2010/11
Full sample
Tradables
Nontradables
2011/12
2012/13
Table 2
2013/14
2014/15
25th percentile
5.3
5.0
4.2
4.5
3.7
Median
9.3
8.8
7.9
7.1
6.0
75th percentile
19.6
24.3
17.5
14.9
12.0
25th percentile
5.1
4.2
4.0
4.1
3.0
Median
8.7
6.8
6.5
6.1
5.4
75th percentile
20.5
20.3
15.9
12.2
10.1
25th percentile
5.2
4.9
4.1
4.3
3.5
Median
9.0
10.0
8.5
7.5
6.5
19.2
26.2
19.1
17.2
12.8
75th percentile
Source: S&P Capital IQ.
22
Simply wrong hedges could have important financial
implications
Derivative losses of non-financial corporations during the global financial crisis
Country
Company/
Sector
End-2007
Profitability (%)
ROA
Brazil
Table 3
ROE
End-2008
Solvency/leverage (X)
Liab/
Assets
Debt/
Earnings1
5-y growth (%)
Interest
cover
Total
Rev3
Gross
profit3
(USD, mn)
Gross
profit
FX
losses
Paper
6.7
20.5
0.5
1.8
7.5
13.6
7.2
498
2,100
Supermarket
5.6
27.1
0.6
3.5
n.a.
16.0
14.2
559
1,012
China
Diversified
2.1
20.5
0.4
6.7
14.0
11.5
24.3
1,039
2,050
Korea
Shipbuilding
2.0
16.7
0.8
1.3
15.1
17.6
4.9
1,102
1,038
Mexico
Retail
5.2
12.0
0.4
1.3
6.2
7.5
9.6
797
2,225
Cement
4.3
14.1
0.6
4.5
5.5
23.4
16.8
5,206
1,350
Chemicals
4.5
10.1
0.7
2.7
4.4
21.8
13.4
1,406
277
Glass
5.6
1.4
0.7
3.6
2.3
1.2
1.6
562
240
1
Total debt/EBITDA (earnings before interest, taxes, depreciation, and amortization).
annualised growth rate.
2
EBITDA/interest expenses.
3
Compound
Sources: S&P Capital IQ; company reports.
23
Corporate sector and broader financial stability risks
From a macroeconomic perspective . . .
1.
Aggregate currency mismatches have increased in EMs – but
standard residence-based statistics do not take account of debt of
offshore affiliates of EM companies.
2.
Low world real long-term rates have increased borrowing in
global dollar bond markets and raised foreign holdings of local
currency domestic government bonds.
3.
Lengthening of the average maturity of EM bond debt in their
portfolios may make foreign investors more “flighty” as interest
rate expectations change. (Has it also accentuated contagion from
bond to forex markets?)
24
. . . and a microeconomic perspective
4.
Many EM companies face financing challenges:
 Lower profitability and increased leverage have made the
corporate sector more vulnerable to demand shocks, to
currency shocks and to interest rate shocks.
 Some firms producing non-tradable goods borrowed heavily
in dollars – creating microeconomic mismatching.
 Debt-servicing capacity – earnings over interest expense –
has been declining since late-2012 (eventhough interest
rates have remained low).
25
References
Avdjiev, S, M Chui and H Shin (2014): “Non-financial corporations from emerging market
economies and capital flows”, BIS Quarterly Review, December, pp 67–77.
Bruno, V and H S Shin (2015): “Global dollar credit and carry trades: a firm-level
analysis”, BIS Working Papers, no 510, August.
Caruana J (2016): “Credit, commodities and currencies”, Lecture at the London School of
Economics and Political Science, 5 February 2016.
Carstens, A (2015): “Challenges for emerging economies in the face of unconventional
monetary policies in advanced economies”, Peterson Institute for International
Economics, Washington, DC, 20 April.
Chui, M, I Fender and V Sushko (2014): “Risks related to EME corporate balance sheets:
the role of leverage and currency mismatch”, BIS Quarterly Review, September, pp 35–
47.
Shek, J, I Shim and H S Shin (2015): “Investor redemptions and fund manager sales of
emerging market bonds”, BIS Working Papers, no 509, August.
Sobrun, J and P Turner (2015): “Bond markets and monetary policy dilemmas for the
emerging markets”, BIS Working Papers, no 508, August.
26