Talking a bit more about currencies... The recent turmoil in the global financial markets has clearly rattled all currencies. Emerging market currencies, in particular, have witnessed severe battering after China's yuan devaluation. As you would know, such volatility in the currency market is detrimental to smooth function of economies and international trade. But the adverse impacts can further be compounded if a country has too much foreign currency debt.
Today's chart of the day shows the largest emerging market sovereign debt issuers. As per Moody's Investors Service, emerging market sovereign debt has grown nearly five-fold between 2000 and 2014. After China, India has emerged as the second largest emerging market sovereign debt issuer. Should the outstanding sovereign debt be a matter of worry for these emerging markets?
An important question to be asked in this context is the composition of sovereign debt - how much is denominated in foreign currency and how much in local currency... The answer is relieving. Most of the new debt issuance by emerging market governments has been in local currencies. Here are the numbers... While emerging market foreign currency sovereign debt grew at a tepid annual average rate of 2.3% between 2000 and 2014, the local currency sovereign debt has grown way faster at 14.4% per annum. As a result, 88% of the total emerging market sovereign debt was in local currency at the end of 2014. It is worth noting that India accounts of 14.7% of the total local currency debt issued by emerging markets.
What does this shift in the emerging market sovereign debt composition indicate? It means that the local sovereign bond markets have matured and deepened, allowing governments to source funds in local currency instruments. This is indeed a positive sign. It has reduced the susceptibility of these countries to economic shocks compared to previous decades. Also, the growth and
Data Source: Moody's Investor Service, Economic Times