According to Nomura’s Nordvig and team “the EM [FX] debt bonanza is over”.
Which is nice if you thought it was a measure of building risk…
After three years (2012-2014) of very strong net issuance in emerging markets (around $250bn per year), issuance has dropped to much lower levels during 2015. Chinese entities managed to issue around $50bn in debt, mostly in the early part of the year, but net issuance in other emerging markets has essentially ground to a halt.
And here’s that paragraph, from JPM’s Niko Panigirtzoglou and team, with our emphasis:
- First, we disagree with the description that FX reserve depletion is QE in reverse. This is because the FX reserve depletion that is happening currently is not an exogenous policy action but represents a policy reaction to capital flows out of EM. But the capital that leaves EM does not disappear from the financial system. In fact, the capital that flows out of EM could find its way back into DM bonds. For example three major manifestations of capital flowing out of EM are 1) the reduction of dollar denominated debt previously issued by EM corporates, 2) the accumulation of dollar deposits by domestic EM corporates or other entities who try to protect themselves against further dollar appreciation, and 3) the withdrawal of EM currency (e.g. Renminbi deposits) by foreign investors who in turn convert them back into dollar deposits.
Suggestion for a new series: things Buiter said a while ago that we need to talk about again.
This time… the search for a nation state’s “comprehensive balance sheet”. Which is exactly what it sounds like: a plea to establish a realistic balance sheet full of contingent liabilities and properly valued assets.
The new thing this time is that we’re talking about this balance sheet alongside the idea that “governments across the world are either ignorant of the true value (or indeed the existence) of some of their most important assets – they often have actively tried to hide these assets and have been highly successful in doing so.” Read more
Some interesting stuff on corporate balance sheets from SocGen’s Albert Edwards on Wednesday.
Edwards observes, for example, that corporate leverage is finally recovering after a temporary retraction: