EM debt in peril on tight Fed, Morgan Stanley says
Morgan Stanley

Hong Kong • Policymakers in emerging markets (EMs) should be hoping the Federal Reserve (Fed) continues on its path of gradual interest-rate rises as some are exposed to any sharp increases in the US, according to Morgan Stanley.

The exposure is a result of substantial external debt linkages. Most EM external debt — 20% of gross domes- tic product (GDP) — is denominated in a foreign currency, with the largest component being corporate debt in US dollars.

Overall foreign currency debt in the EMs excluding China rose from 22% of GDP in 2011 to 30% in the first-quarter of this year. Most of the increase comprises longer-term obligations, with the level of short-term loans remaining relatively low at 8% of GDP.

“While this means that EMs will be better protected from short-term foreign-exchange volatility, they remain exposed to big shifts in US dollar and US rates,” Morgan Stanley economists wrote in a note.

Countries where there are risks associated with the rise in foreign currency debt include Chile, Malaysia, Brazil, Turkey and Mexico, while South Africa, Colombia and Indonesia are exposed to foreign ownership of local government bonds. — Bloomberg