A large-scale shift toward domestically issued and longer-dated bonds in emerging markets has helped build resilience to external shocks despite the increase in overall debt levels, the Bank for International Settlements said.
The BIS, an umbrella body for global central banks, has warned in the past that developing world risks were entering a new crisis because of a build-up in debt levels, especially in China. But its latest report found that changes in the composition of debt were a mitigating factor.
“Borrowing is mostly done in local currencies, at longer maturities and at fixed rates. Taken together, these trends should help strengthen public finance sustainability by reducing currency mismatches and rollover risks,” the BIS wrote.
Its quarterly report released on Sunday said emerging market government debt stood at $11.1 trillion, having doubled since end-2007. Public debt as a share of gross domestic product had risen to 51 percent, 10 percentage points above end-2007 levels.
But only 14 percent of the outstanding debt of 23 of the big developing countries was in foreign currency, its data showed, down from 32 percent at the end of 2001.
While foreign borrowing still made up about a third of the total in some countries such as Saudi Arabia, Turkey and Poland, such issuance has broadly declined.
“The fall in the share of FX-linked debt in the early-2000s may have helped shield emerging economies from the global market turbulence of the 2007–09 crisis and its aftermath,” the study added.
The BIS also noted that bond tenors had risen steadily across emerging markets, with an average maturity of 7.7 years for its sample set of 23 countries. This is only slightly below the average of eight years in developed countries.
It cited Mexico and South Africa as examples of countries that had extended average maturity to eight and 16 years respectively – well above many advanced nations.
This is not entirely without risk, however, the BIS warned.
Longer maturities mean higher global bond yields – possibly as developed nations exit years of super-easy credit policies – “could have a greater impact than previously on the market value of debt, potentially increasing rollover risks and other adverse feedback mechanisms,” the report added.
That is because interest rate rises tend to fuel a bigger drop in the price of longer-dated bonds than in those with shorter maturities.