Local Bonds’ Demanding Investor Dissection
Amid relentless local bond outflows since mid-year 2013 from foreign investors with large ownership stakes, an IMF working paper strives to gauge “demand-side risks” through a detailed buyer breakdown in 25 countries. It stipulates that on the supply side public debt managers have succeeded in extending maturities and shifting from floating to fixed rates but they have “less control” over holders who freely trade in secondary markets. The study aggregates official and commercial data to construct a comprehensive profile of bank and non-bank participation in the half trillion dollars allocated to domestic sovereign paper from 2010-12 during zero-rate advanced economy monetary policies. It then simulates withdrawal shocks to assess liquidity and liability outcomes and their borrowing cost implications especially as long-term “real money” exits the mix. Sources include Eurostat, the BIS, IMF-World Bank and national central bank and finance ministry reporting available at regular intervals to approach the frequency of EPFR and other fund industry providers. Only gross debt at face value is measured outside of guarantees, derivatives and contingent obligations, and results are reconciled with the Fund’s reserve and portfolio manager surveys. The cumulative foreign-held share is estimated at $1 trillion, 80 percent from mainly private asset directors and only $40-80 billion from central banks limited to prime-quality exposure in a half-dozen destinations including the BRICS other than India and Brazil along with Malaysia, Mexico and Poland. Average emerging market international stakes are 25 percent, 10 percent below industrial country counterparts, but the portion has jumped with investment-grade status reaching one-third the sample including mid-size destinations like Colombia and Peru. During the 2008-09 crisis a “relatively modest” $50 billion left mostly in Central Europe where Hungary, Latvia and Romania received bilateral and multilateral rescues. After this episode economic fundamentals recovered to resume inflows, but “yield search” was also an overriding factor, according to the analysis. Since the domestic bank purchases have declined notably in Asia and Latin America, although government securities are over one-fifth of assets in Argentina and India and more than 15 percent in Brazil, China, Philippines and Turkey.
Under stress scenarios rollover difficulties could affect Hungary with tough conditions while a wider panic would affect Indonesia and Turkey. Colombia, Poland and Mexico have backup Fund liquidity for support, but yields could spike elsewhere especially with currency depreciation and banks under pressure as well from corporate and household weakness. In June 2013 foreign investors were most overweight Mexico at 5 percent over the GBI-EM component and underweight Russia and Thailand. The latest consensus Wall Street views muffle Mexican excitement on 3 percent GDP growth and the meandering energy reform implementation path over the coming months as Pemex faces additional scrutiny over its ties with a bankrupt maritime service supplier. Russia’s central bank revealed $1.5 billion in outflows from the 20 percent overseas control around the Crimea confrontation, while Thailand’s numbers have been steady despite protestors’ unmet administration dismissal demands.
