Central Banks’ easy money bolster markets & debt soars- BIS

Global markets, albeit jittery, have recovered sharply this year as investors and traders believe that monetary ease will continue.

“The very gradual monetary tightening process is on pause and has become less predictable,” says Claudio Borio, Head of the Bank For International Settlements Monetary and Economic Department. “The narrow normalisation path is proving to be a winding one.”

The BIS cautions, however, that developed and emerging market foreign currency borrowing (excluding banks) remains at a very high level. Leveraged, i.e. highly indebted companies could come under pressure in the event of an economic downturn. At the end of the third quarter 2018, total global US dollar non-bank borrowing outside the United States amounted to $11,480 billion , up from $11,422 in the first quarter. Including euro and to a lesser extent yen, the amount totalled $14,800 billion.

The emerging Asian, South American, Middle Eastern, East European and African US dollar borrowing proportion was $3,663 billion and including euro and yen borrowing, totalled $4,334 billion.

Emerging Markets resilient despite China’s slowdown

Despite the sizeable foreign debt, “emerging market economies (EMEs) held up remarkably well” Mr Borio said. “This was so despite the slowdown in China, which once again induced monetary and fiscal easing.”

“More than the uncertainty and reality of trade tension, it was the headwinds from the Chinese economy’s necessary deleveraging that seemingly weighed down on activity,” Mr Borio added. “If anything, China’s condition appeared to exert more of an influence on economic developments in advanced economies (AEs), notably in the euro area, than in EMEs.”

Mr Borio continued that EMEs are doing better because of the efforts they have made to strengthen their economies and financial systems. The US dollar hasn’t surged recently and monetary policy in AEs is more accommodating. Investors are thus taking greater risks and are pumping money into emerging market bonds and equities.

A positive factor relating financial institutions in both developed and emerging markets, is that they are tightening controls on “aggressive risk-taking and overextension”. This speculative positioning tend to precede financial crises. Since there is greater monitoring of balance sheets, “financial institutions should be better placed to absorb the blow when market liquidity does come under strain”.

Source: BIS

Bryan Hardy, an economist at the BIS stated in a paper, that credit to non-financial borrowers in EMEs has increased rapidly over the past decade from both bank and non-bank sources. Banks are the main source of credit to the private non-financial sector and accounted for 77 per cent of total lending in the second quarter of 2018. Credit from non-banks has also been expanding at an average annual rate of 4.5 per cent over the past decade. Emerging market borrowers obtain 15 to 20 per cent of their credit from foreign banks on average. Over half of that is local currency lending from subsidiaries.

“Such subsidiaries are, to all intents and purposes, local banks, and give rise to fewer concerns about financial stability.”

The good news is that after the global financial crisis,  EME average reliance on foreign bank credit steadily decreased from28 per cent of the total in 2008, to 19 per cent a decade later.  But EMEs may still be vulnerable, as foreign lenders have become more concentrated.

“For instance, if an EME gets all of its foreign bank credit from banks headquartered in just one foreign country, developments in that country may have a significant effect on credit provision,” Mr Hardy writes. He estimates that 70 to 80 per cent of borrowing typically comes from the US, EU and UK. These top-ranked creditors provide 40 per cent of total foreign bank credit and the second highest ranked creditors provide around 20 per cent.

© Copyright Neil Behrmann This article was first published in The Business Times, Singapore
Neil Behrmann
is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner. See reviews of both books on https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M

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