The BIS quarterly review continued a theme of global financial crisis retrospectives with an examination of foreign bank control of overall lending in major emerging economies, which aggravated Europe’s plight in particular amid cascading upsets the past decade. The current 12% -15% share may be half the previous average, but country concentration among a handful of institutions is higher at 75% with private borrowing prominent, as official access is mainly through bond markets. Such non-bank lines increased 5% annually, while traditional cross-border loans are flat, and trends vary by location, sector and over time. Mexico, Poland and Chile have the most reliance since foreign groups also have big local operations, with business in the first getting half of credit from the common source. At the opposite extreme is China, as well as households as a class, and funding techniques as risk measures are not explored as a further layer, with domestic deposits the safest alternative. Concentration declined before the 2009 collapse, but now Indonesia and Turkey depend heavily on respective Asian and European bank facilities. Private sector claims in a geographic cross-section are lodged three-quarters in the top three international banks, according to the analysis. Units from Belgium, Germany, the Netherlands and Switzerland retreated while ones in Australia, Canada, Japan and Spain became more active. The US and UK have the most outstanding, and official outweighs private sector dominance in places like South Africa. Stability concerns have transformed over the period but remain pressing with these patterns, and bond dependence is a separate issue for consideration.
A recent US-German academic study shows emerging market bonds outperformed rival classes over history despite frequent default periods with their underlying return premium. The authors trace the record from the 1800s through the Argentina “century sale” and IMF rescue last year, which narrowly avoided another interruption after seven previously. Sovereign hard currency performance was 5% above the US and UK over 125 years, and the controversial century instrument could retrace its secondary issue price in the coming months as the category recovers strongly so far with US Federal Reserve tightening caution. Corporate bonds drew an alarm over “fallen angels” with the next downturn, as BBB-rated ones now are 30% of the investment-grade space that could tip into junk. Developing market issuance quadrupled the past decade, with China’s alone over half a trillion dollars, the Paris-based OECD reported. Over the medium term $4 trillion must be refinanced globally, as economists predict end-decade recession, but for now investors are enjoying solid fixed-income gains after 2018’s negative results on JP Morgan’s hard and local currency benchmarks. According to its investor survey at the Americas corporate conference, the relative good times should last with steady GDP growth and commodity prices, and minimal drag from trade confrontation and incremental rate hikes. In Latin America, Brazil was a favorite under the new business-friendly administration followed by Argentina, while Mexico was the laggard with expected downgrades under the populist AMLO regime. State oil behemoth Pemex received budget help but is set for a downgrade, and the sovereign outlook went negative with fiscal policy unreliability a credit blemish.