Home' Trinidad and Tobago Guardian : March 22nd 2015 Contents SBG14 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MARCH 22 • 2015
In the world of economics, one pol-
icy-maker towers above all others.
The head of America s central bank,
Janet Yellen, presides over a US$17
trillion economy. The empire of her
nearest competitor, Mario Draghi of
the European Central Bank, amounts
to a relatively puny US$10 trillion.
On top of this, the dollar s global role means
that Yellen has a huge impact abroad, influ-
encing more than US$9 trillion in borrowing
in dollars by nonfinancial companies outside
America, more than enough to buy all the
firms listed on the stock exchanges of Shanghai
and Tokyo. As the dollar strengthens, both in
response to healthier growth in America and
in the expectation that the Federal Reserve is
getting ready to raise rates, this burden is
becoming harder to bear.
Dollar borrowing is everywhere, but the
biggest growth has been in emerging markets.
Between 2009 and 2014 the dollar-denom-
inated debts of the developing world, in the
form of both bank loans and bonds, more than
doubled, from around US$2 trillion to some
US$4.5 trillion, according to the Bank for Inter-
national Settlements. Places such as Brazil,
South Africa and Turkey, whose exports fall
far short of imports, finance their current-
account gaps by building up debts to foreign-
ers.Even countries without trade gaps have been
borrowing heavily. With interest rates on Amer-
ican assets so meager---a five-year Treasury
bond pays only 1.5 per cent---those with dollars
to invest have sought out more rewarding
opportunities. Companies based in emerging
markets seemed to fit the bill.
Some are big names: State-owned energy
giants such as Russia s Gazprom and Brazil s
Petrobras have been issuing dollar bonds via
subsidiaries based in Luxembourg and the
Cayman Islands. Others are smaller: Recent
months have seen Lodha Group, an Indian
property developer, Eskom, a South African
power generator, and Yasar, a Turkish firm
that makes TV dinners, sell dollar-denominated
bonds. By borrowing dollars at several per-
centage points below the prevailing interest
rate in their domestic currency, CEOs have
pepped up profits in the short term.
Finance rarely offers a free lunch, however.
The worry is that tumbling energy prices mean
that firms such as Gazprom and Petrobras
now have much lower dollar incomes than
they expected when they took on debts. Others,
such as Lodha, Eskom and Yasar, have few
dollar earnings at all.
Where foreign debts and earnings line up,
there is little reason to worry. Asian companies
foreign-currency debts tripled from US$700
billion to US$2.1 trillion between 2008 and
2014, going from 7.9 per cent of regional G.D.P.
to 12.3 per cent, according to economists at
Morgan Stanley. To see whether the surge was
bearable, the economists looked at the accounts
of 762 firms across Asia.
The findings were reassuring: On average
22 per cent of their debt is dollar-denominated,
but so are 21 per cent of their earnings.
Although Asian companies are a big part of
the emerging-markets borrowing binge, on
the whole they seem well placed to cope with
a rising dollar.
There are still two reasons to worry, how-
First, the outlook for China is a puzzle. The
country holds US$1.2 trillion in Treasury bills,
many of which are sitting in its sovereign-
wealth fund. When the dollar rises, the fund
gets richer. Even in a dollar-rich country,
though, there can be pockets of pain. China s
companies have built up a nasty currency mis-
match. Almost 25 per cent of corporate debt
is dollar-denominated, but only 8.5 per cent
of corporate earnings are. Worse, this debt is
concentrated, according to Morgan Stanley,
with 5 per cent of companies holding 50 per
cent of it.
Chinese property developers are the most
obviously vulnerable. Companies such as Ever-
grande, China Vanke and Wanda build and
sell offices and houses, so most of their earnings
are in yuan.
Banned from borrowing directly from banks,
they have been active issuers of dollar bonds.
They also have borrowed from trust companies,
according to Fitch, a rating agency, and the
trusts themselves are highly leveraged and
have borrowed dollars via subsidiaries in Hong
Kong. This arrangement will amplify the eco-
nomic pain if property prices in China continue
to decline, as they have been doing for several
The second problem is that whole
economies, rather than simply the corporate
sector, look short of dollars. In Brazil and Rus-
sia, for instance, bailouts of firms lacking
greenbacks are blurring the lines between the
state, banks and big companies. The general
scramble for dollars has contributed to the
plunge of the real and the ruble.
Others could follow this path. Turkey s dollar
borrowing has grown rapidly since 2009: In
addition to the debts Turkish firms have taken
on, the state s external debt has grown to
almost 50 per cent of GDP, far above the 23
per cent average for middle-income countries.
South Africa looks worrying, too, with a cur-
rent-account deficit that is the widest of any
big emerging market, and the government s
external debt is 40 per cent of GDP.
A wave of defaults would be unlikely to
cause problems as widespread as the subprime
crisis of 2008. Most bonds are owned by deep-
pocketed institutional investors, such as pen-
sion funds and insurers. The banks that have
made loans face far tougher regulation than
they did eight years ago, and generally are far
better capitalised. An emerging-market rout
would not cause another Lehman moment.
It would mean big job losses at stricken
companies, however. As investors re-price risk
it probably also would lead to a sudden tight-
ening of credit. In countries such as South
Africa or Turkey, where growth is evaporating
fast, that could still be very painful.
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
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