Rise in bond issuance could pose risk to global economy
Data compiled by UN DESA’s Development Policy and Analysis Division (DPAD) found that the surge in global bond issuance may pose a risk to the global economy.
According to the division’s latest monthly World Economic Situation and Prospects (WESP) briefing, global bond issuance continued to grow at a rapid pace in 2016, continuing recent years’ trend as firms search for higher-yield assets to take advantage of loose financing conditions and large capital inflows.
This has led outstanding corporate bond levels to soar in many emerging economies during the post-crisis period.
In fact, many international bonds are denominated in USD. This poses a higher exchange risk to borrowers as international dollar debt has risen from pre-crisis levels of $600 billion to $1.5 trillion as of the second quarter of 2016.
And while rising leverage doesn’t necessarily pose a risk, the danger emerges when corporate debt rises and profits fall.
Along with the weakened ability to bear risk, high corporate leverage in a country may also increase its government’s contingent obligations. This eventually makes it harder for large-scale government spending to support growth.
However, Saudi Arabia managed to make the largest-ever bond issuance from an emerging economy by selling $17.5 billion internationally. This is close to a fifth of its 2016 fiscal deficit which is expected to reach about 13 per cent of the nation’s GDP.
The larger-than-expected success amid low global interest rates that Saudi Arabia experienced has increased liquidity and confidence in financial markets as it paves the way for further international bond issuances in the near future.
But in some cases, countries have looked to financing rising debt-servicing costs by issuing additional dollar debt. This could eventually lead to concerns of default, which in turn would put downward pressure on local currencies, creating a vicious cycle of rising debt-servicing cost and currency depreciation.
Among all developing regions, non-financial corporations in Africa and the Middle East experienced the most dramatic increase in exposure to risks associated with the dollar’s appreciation.
In particular, the Central Bank of Egypt devalued the Egyptian pound by more than 30 per cent against the USD while announcing the free-float of the currency.
While devaluating the domestic currency is a condition of the $12 billion loan agreement between Egyptian authorities and the IMF, the effort was also done to alleviate severe foreign currency shortages in the economy.
Although rising import costs will add to an already elevated inflation of 14.1 per cent in September, the move to devalue the currency was well-received by investors as Egyptian equity markets rose by 3.4 per cent following the announcement.