Emerging Market Debt

Emerging Market (EM) debt is a serious problem for the global economy. The situation becomes more complicated when a country has foreign debt denominated in US dollars. Even if the US dollar remains constant in Forex markets globally, the local company and/or government can find itself in difficulty if the local currency falls against the US dollar. Servicing the debt, that is, making interest payments either semi-annually or yearly, becomes more expensive in terms of the local currency, and repayment, when it is due, also becomes more expensive.

A refinancing wall refers to the amount of debt maturing, that is, that has to be repaid or possibly refinanced by companies and governments in the future, and the situation is critical. Bloomberg figures indicate that 2018 will see $150 billion due with over $150 billion due yearly through to at least 2021.

This weight on the global economy is caused by the great increase in debt that came about because of the low-interest policy of the Fed inaugurated in 2008 to combat the GFC. It was too tempting not to borrow US dollars at almost zero interest rates to finance all sorts of projects. This explains how it came about that EM debt exploded from about $ 2.5 trillion in 2008 to over $ 8 trillion in 2018.

Some countries went on a dollar-borrowing binge that increased their foreign debt exposure to GDP to unreasonable heights. Turkey`s exposure is almost 70% with Hungary not far behind. Poland and Chile are also extremely vulnerable, followed by Argentina, Malaysia, South Africa and Colombia.

The country that has borrowed the most in terms of quantity is China, and pundits wax eloquent on the dangers to the world economy posed by excessive Chinese debt. Since the economy is closely controlled by the government, it may well be that the creation of debt is part of the plan to make the renminbi a dominant international currency. If the US can implement QE and create huge amounts of money, then China could do the same and not be overly concerned that the local currency may weaken against the US dollar.

What has happened recently to various EM currencies, however, including the Turkish lira, Argentine peso and South African rand, may be the prelude to a much more far-reaching crisis of which US dollar debt is only a part. Default is probable in some cases, and that could set off the great reset.

Walter Snyder    

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