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EM corporates face debt burdens despite no expansion of leverage

EM corporate debt levels remain high, but unlikely to grow significantly. There is a substantial amount of corporate debt that will require refinancing over the next two years, which could be complicated by the actions of the Fed, but many EMs have sufficient liquidity to enable local corporates to access funding internally to finance their burdens.

Jul 7, 2016 // 4:56PM

In a recent research note to investors, Babson Capital said EM corporate debt levels are likely to stabilise in the near future; borrowing and lending are set to slow, which would naturally lead to a stabilisation in in debt levels. 

With concerns over the Fed hiking rates (albeit not for a while) and the fact that many EM currencies have weakened, both borrowers and lenders will be more cautious about operating in the DCM space than before.

“There will be caution on both the supply and demand side, especially over concerns about the weakness of various EM currencies which could increase borrowing costs”, said Jakob Christensen, chief analyst and head of EM research at Danske Bank.

Although the main reason for the slowdown in lending is down to supply side factors, EM corporates connected to the commodity and export sectors have been able to expand their leverage significantly.

However, figures from Babson Capital’s report also show that between 2016 and 2019, a significant proportion of financial sector debt will also be maturing, amounting to almost US$90bn in 2017.

“The ability of commodity and export related entities to service their debts has been higher than domestically focussed companies due to dollar revenues, but pressured commodity prices have meant that many such companies need to adjust to the new realities.”

While EM leverage is sectorally and geographically diverse, Christensen noted that the highest levels of corporate leverage in the EM space are in countries that are more advanced and integrated into the global financial system than other EM countries.

According to Babson Capital’s report, the majority of maturities between 2016 and 2019 are from Asian corporates. However, alongside Asian nations such as Malaysia and Thailand, LatAm countries such as Brazil and European countries including Russia, Hungary and Poland also face significant maturity repayments.

Less advanced EMs or frontier markets, including some countries in Africa and Asia, have less debt exposure on the corporate side.

“This could be an advantage as their corporate sectors are not highly leveraged because they have not built up the same liabilities on the private sector side."

“Going forward, growth will be connected to debt leverage.”

The amount of maturing debt the EM corporate sector faces in the coming years is substantial. Debt amounted to over 70% of GDP in 2014 according to the IMF. The total maturities due in both 2017 and 2018 amount to over US$130bn according to RBS credit research.

However, despite a need to refinance, difficult market conditions lie ahead, and the external environment will be challenging due to the Fed’s hiking cycle. The first rate hike is priced in for January 2018, though Christensen expects it to come in June next year.

Many EMs will however be able to provide liquidity without entities having to turn to international markets.

“The ability to refinance also depends on the domestic environment. Many EMs have quite sizeable FX buffers, and will be able to supply FX without sparking a foreign debt crisis,” Christensen added.

Global Macro

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