September 2015 BIS Quarterly Review: vulnerabilities of emerging market economies take centre stage
13 September 2015
The September issue of the BIS Quarterly Review highlights the increased focus of investors on vulnerabilities in emerging market economies and the consequences for global markets.
The issue also introduces enhancements to the statistical series compiled and published by the BIS. In particular:
- The BIS locational and consolidated banking statistics have been enhanced and expanded in a number of ways. Taken together, the enhancements enrich analysis of banks' lending and funding and of their role in the transmission of shocks across countries.
- A new data set on general government debt contains consistent quarterly figures on core government debt for 40 advanced and emerging market economies.
- The BIS has started to estimate private sector debt service ratios (DSRs) - the ratio of principal and interest payments to income - for 32 advanced and emerging market economies.
Statistical special features describe these enhancements in more detail. In addition, an "Introduction to BIS Statistics" highlights the different statistical data sets compiled by the BIS and how they can be used in economic and financial monitoring and analysis.
The regular commentary on recent developments in financial markets and global financial flows notes the following:
- Investors are increasingly concerned about growing vulnerabilities in emerging market economies - in particular, China - as they reassess the global growth outlook.
- Developments in China, coupled with the Greek negotiations in June and early July, dented the confidence of investors and weighed on asset prices globally. A self-reinforcing cycle of weakness followed in commodity prices, then in emerging economy equity markets and exchange rates, leading to upsets in advanced economy equity markets.
- Many of these events were presaged by shifts in international banking, securities and global liquidity earlier in the year. Global liquidity conditions were strong in the early months of 2015, particularly among advanced economies, but showed signs of weakening for emerging economies.
- At end-March 2015, financing of non-bank borrowers in US dollars outside the United States totalled $9.6 trillion, while financing of non-banks in euros outside the euro area came to $2.8 trillion.
- Euro-denominated cross-border claims and lending to the euro area and other European countries surged during the first quarter of 2015, although Greece was a notable exception.
- In the first half of 2015, net debt securities issuance by advanced economy borrowers rose to its fastest pace since before the global financial crisis, while issuance by emerging economy borrowers slowed.
Finally, two special features address economic issues:
- US short- and long-term interest rates have a statistically and economically significant impact on the corresponding rates in emerging market and smaller advanced economies, even when one controls for economic and financial linkages. Furthermore, these effects reflect in part monetary policy spillovers, ie US policy rates influence policy rates elsewhere.
- Cross-border banking within Asia-Pacific has strengthened as European banks have retreated from the region post-crisis. Asia-Pacific authorities are seeking ways to balance the efficiency gains from greater regional integration with the need to confront regulatory and financial stability challenges, eg by monitoring and mitigating banks' liquidity and funding risks.
Summaries of individual chapters
In recent months, investors have increasingly focused on vulnerabilities in emerging market economies (EMEs) - in particular, China - as they reassess the implications for global growth. In China, equity markets plunged in June-July 2015 following a boom that had sent many stock valuations to extreme levels. This, coupled with the Greek negotiations in June and early July, dented investor confidence and weighed on asset prices worldwide.
Led by oil, commodity prices resumed the downtrend that had started in 2014 with a brief interruption in the second quarter of 2015. Perceptions of falling demand due to weakening economic activity in a range of EMEs most likely played a key role. In turn, falling commodity prices further hurt the growth outlook for commodity-producing EMEs. As a result, many commodity producers saw renewed depreciation of their exchange rates, which was exacerbated by another episode of dollar strengthening on the US monetary policy outlook.
In government bond markets, yields increased sharply in April and May, before falling again in June. The surge in yields had its epicentre in the German government bond market. A box examines the role of changing market liquidity conditions during this episode.
Global liquidity was strong in the early months of 2015, particularly among advanced economies. International financing picked up in those economies, marked by especially strong growth in euro-denominated bank and capital market financing. At the same time, the financing of emerging market economies showed signs of slowing, notably for China and Russia.
At end-March 2015, financing of non-financial borrowers in US dollars outside the United States totalled $9.6 trillion, while euro-denominated financing of non-financials outside the euro area came to $2.8 trillion. Global cross-border claims of BIS reporting banks continued to expand in early 2015, while international debt securities issuance continued at a healthy pace.
However, while banking and securities issuance was strong in the advanced economies, the international financing of emerging market economies slowed. Bank lending to them shrank by $52 billion on an exchange rate-adjusted basis in the first quarter of 2015. Net debt securities issuance by advanced economy borrowers totalled $247 billion in the first half of 2015, the fastest run-up since before the global financial crisis. Emerging economy borrowers, meanwhile, issued $137 billion in the first half, net of repayments - a notable slowdown from the previous three years. Early warning indicators suggested that key emerging economies continue to be vulnerable to debt overhangs.
Statistical features on enhancements
The BIS has expanded its statistics by publishing additional data, revamping their dissemination and strengthening their policy orientation. This special feature, prepared by members of the BIS Monetary and Economic Department, briefly describes each BIS data set and explains how the statistics can be used for analysis.
The BIS international banking statistics evolve in response to changes in the international financial system. The latest enhancements add information about banks' domestic business and more details about their counterparties. Taken together, the new features will support a richer analysis of banks' lending and funding and their role in the transmission of shocks across countries, as Stefan Avdjiev, Patrick McGuire and Philip Wooldridge (BIS) explain.
A new data set on general government debt for 26 advanced and 14 emerging market economies is presented by Christian Dembiermont, Michela Scatigna, Robert Szemere and Bruno Tissot (BIS). Combined with the BIS series on credit to the non-financial private sector, BIS data sets can now capture the indebtedness of all non-financial sectors. The new data set includes series expressed in both nominal (actual repayment amounts) and market values. As far as possible, data are constructed using consistent principles for consolidation, instrument coverage, sector coverage and other dimensions. While the resulting series focus on the core instruments of government indebtedness, they should prove useful for comparative cross-border analysis.
Important information on the interactions between debt and the real economy can be derived from debt service ratios (DSRs), ie the ratio of principal and interest payments to income. The BIS has accordingly released estimated aggregate DSR data for the total private non-financial sector for 32 countries from 1999 onwards. The methodology and key concepts are presented by Mathias Drehmann, Anamaria Illes, Marjorie Santos (BIS) and Mikael Juselius (Bank of Finland). For most countries, DSRs are available for both the household sector and the non-financial corporate sector. This article shows that estimated DSRs can meaningfully portray the movement of debt burdens over time, even though they are extracted from a relatively sparse set of aggregate data. A brief look at the evolution of DSRs in recent years shows that they allow a more comprehensive assessment of credit burdens than the credit-to-income ratio or simple measures of interest payments relative to income, because they take both interest payments and amortisation into account.
In recent years, interest rates have moved closely together worldwide, even though business cycles have been at different stages across countries. Boris Hofmann and Előd Takáts (BIS) ask how far international monetary spillovers have driven this co-movement, ie whether interest rates in core advanced economies are driving interest rates elsewhere. Studying 30 emerging market and smaller open advanced economies since 2000, they find that (i) US short- and long-term interest rates significantly affect the corresponding rates in other economies and (ii) these price spillovers do in part reflect policy spillovers. In other words, US monetary policy rates do influence policy rates in other countries more than might be expected from normal spillovers of macroeconomic conditions.
Before the Great Financial Crisis of 2007-09, much cross-border banking activity in Asia-Pacific was driven by dollar lending from European banks. Ilhyock Shim and Eli Remolona (BIS) find that, post-crisis, this global intermediation has lost much of its European leg. Banks from within the Asia-Pacific region now dominate cross-border activity. At the same time, Asia-Pacific banks have taken a rising share of short-term foreign currency lending. Financial authorities in the region are looking to arrangements such as the ASEAN Banking Integration Framework to help them balance the efficiency gains of regional integration against the need to monitor and control the risks of financial instability.
* Signed articles reflect the views of the authors and not necessarily those of the BIS.