BIS flags emerging-market risks as $340 billion of debt matures

New York: A 40 per cent increase in the amount of corporate debt coming due in developing nations over the next three years is creating a potential default risk if investors start pulling money out of emerging markets, according to the Bank for International Settlements (BIS).
About $340 billion of debt is maturing between this year and 2018, the Basel, Switzerland-based institute said in a report on Thursday. The total payments due each year during the period is equivalent to the net bond sales by non-financial companies in developing nations in 2015, it said.
"Given the steep repayment schedule that lies ahead, the refinancing capacity of highly leveraged emerging market economies (EMEs) companies is likely to be tested soon, especially if the rise of the US dollar continues,” economists led by Nikola Tarashev wrote in the report. "As the issuance boom began in 2010 and featured long maturities, scheduled repayments have been modest so far. But they rise quite sharply from 2016.”
While BIS and the International Monetary Fund (IMF) have repeatedly warned about risks after a recent surge in issuance, dollar-denominated corporate bonds from developing nations have returned 11 per cent this year, making them among best-performing assets in the world, according to JPMorgan Chase indexes. Default rates on non-investment grade debt in emerging markets was below the global average in June, according to S&P Global Ratings. Emerging economies have shown nascent signs of recovery with current account balances improving.
‘Particularly vulnerable’
Investors’ optimism is at odds with BIS. Debt sold by non-financial companies in developing nations increased to 110 per cent of their gross domestic product (GDP) by 2015, up from less than 60 per cent in 2006, BIS said in the report. The growth rate is "well above” that of advanced economies, it said.
Developing countries account for one third of the $9.7 trillion dollar debt outside the United States as of the end of last year. BIS singles out Brazil, China and Turkey as particularly aggressive in debt accumulation.
The danger is that once credit becomes less available, borrowing costs will rise and make it more difficult for companies to refinance their debt, according to the BIS. While the yield premium investors demand to hold emerging corporate bonds over US Treasuries has declined from the recent peak hit earlier this year, it remains more than 1 percentage point higher than the level in mid-2014, according to JPMorgan’s benchmark.
"The accumulation of debt since the global financial crisis has left EMEs particularly vulnerable to capital outflows,” the BIS economists said. "As private sector borrowing has led to overheating in several large EMEs, the unwinding of imbalances may generate destabilising dynamics.”