A slew of investment banks this week, including
Deutsche Bank AG, Citigroup Inc,
Morgan Stanley and Societe Generale SA, reckon the pain for emerging markets will intensify in 2017, citing, in part, the rising cost of servicing dollar debts amid a strengthening greenback relative to local currencies, and higher Fed policy rates. "The [debt-servicing] challenge looks even fiercer for non-US borrowers who have borrowed in dollars — dollar strength will make it harder to repay the debt," SocGen analysts, led by Brigitte Richard-Hidden, wrote in a report on Tuesday.
"There are plenty of them, as the outstanding dollar-denominated credit to the rest of the world has more than doubled over the past 10 years to nearly $10 trillion," analysts at the French bank conclude. "EM countries and corporations in particular have been keen on borrowing in dollars ([to the tune of] $3.2 trillion)." Evidence of dollar-funding pressures are already emerging in funding markets in the Philippines, South Korea, Malaysia and India most notably over the past month, although there may be local forces at work too, according to Deutsche Bank, updating their warning
earlier this month that de-globalization in money markets could roil emerging markets next year.
But they warn the Trump regime is a game-changer for a region that, as a whole, has been largely lavished with dollar liquidity in recent years. "To the extent that central banks act as a backstop to replenish dollar lost to outflows, dollar liquidity could stay manageable in Asia. However, should central banks choose to pull back – either on account of reserves adequacy or to allow currencies to adjust for competitiveness reasons — dollar liquidity could have much further to tighten in Asia." In sum, technical indicators — spreads for short-term corporate and banking funding, cross-currency basis spreads, front-end onshore forward markets — may portend a more challenging outlook for dollar liquidity in Asia next year, even if offshore bond markets remain hospitable for issuers in the region.
