The BIS’s Diabolical Deleveraging Plot
The Bank for International Settlements’ end-year quarterly survey for the first time presented a comprehensive matrix of European bank emerging market exposure incorporating local and cross-border elements, with a breakout of short-term and debt securities holdings suggesting the Asia-Pacific region is at greatest pullout risk. As of June, two-thirds of claims there were under one year, and local units accounted for less than half the total. In comparison, Europe and Latin America had higher foreign bank participation as a share of credit outstanding at near 50 percent and 20 percent, respectively, with fixed-income assets at one-fifth and one-tenth of the corresponding portfolios. For the Middle East-Africa, the non-resident lending portion outpaced Asia’s at 75 percent, but vulnerability indicators were otherwise tame. At the upper tier of combined potential flight scores are a number of core recipients including the BRICs, Hungary and Korea. Such borrowers had started to struggle in Q3 on external debt-raising which showed a “marked decline” from China, Russia and elsewhere, and currency and equity derivatives activity likewise retreated in Brazil and South Korea. The EMTA trading figures for the same period chart a 10 percent fall from the year before to $1.75 trillion, concentrated 75 percent in local instruments. Mexican paper topped the list, and corporates were 40 percent of Eurobond volume. Hong Kong, South Africa and Turkey also saw active government debt engagement reaching an aggregate $350 billion. The African portion should be boosted with the launch of JP Morgan’s NEXGEM Index capturing these higher-yielding and less liquid frontier markets, which also transfer existing minor EMBI components from South Asia and Central America/Caribbean.
Ghana and Nigeria sport both domestic and foreign issues which are slated for the roster. The former’s ‘B’ credit rating was recently upheld with a stable outlook despite reservations about fiscal discipline heading into presidential elections. The incumbent is seeking another term and faces the same opponent he barely beat in 2008. Oil-aided GDP growth will drop below 10 percent in 2012 as inflation stays in single-digits. The budget deficit goal of 5 percent of GDP will be missed under the expiring IMF program, which has also breached the commercial borrowing cap with a $3 billion Chinese arrangement. Currency weakness has sparked central bank intervention, but officials are averse to defining a dollar corridor as with Nigeria’s naira where it has been loosened to the 155 range. 7.5 percent growth has been accompanied by 10 percent inflation despite hefty central bank rate hikes. The fiscal gap should remain at 3 percent of output as more money is put into infrastructure, but excludes the bad assets of the AMCON resolution authority which amount to over 10 percent of GDP and are often trapped in transaction indecision.
