As if war, international sanctions and the collapse of oil prices were not enough, Russian companies and banks now face another problem: the collapse of ruble. By 2015 companies and lending institutions will in fact pay back $134 billion of debt in foreign currency. About $32 billion will be granted during the month of December.
And since the beginning of the year ruble has lost nearly 30% against the dollar, these deadlines become more difficult to bear because the devaluation has the indirect effect of raising the debt denominated in foreign currencies. And this is just one of the problems that the recent strengthening of the dollar, which in recent weeks has affected the financial markets, is likely to worsen.
The bubble of foreign debt
Russia is not an isolated case. There are many emerging countries in recent years have increased the debts in hard currency, especially due to the Fed’s monetary policy. The US central bank, flooding the market with liquidity, compressed rates prompting investors to seek income elsewhere. Emerging countries have fulfilled a part of this hunger for yield by increasing substantially the bond issues. Those in foreign currency have doubled between 2008 and 2013, rising from a thousand to two thousand and $100 billion according to the calculations of BofA Merrill Lynch. Adding up to this amount the bank loans you get total foreign debt exposure that travels over 5 thousand billion (+ 66% since 2008). The data is updated at the end of 2013, but the most recent numbers confirm that the propensity will be unaffected. Data collected from S&P Capital IQ show that year to date there have been issues from emerging countries for more than two trillion dollars, 22% of which are denominated in US currency.
The role of the Fed
The problem is that now the party is likely to end: since the Fed has put the brakes on monetary policy, many of these countries have experienced sharp devaluations of their currencies. Since May 22, 2013 (the day when the Fed announced phasing out of QE), the Brazilian real was devalued by 20%, 15% of the South African rand, the Indian rupee by 10% and so on. In 2013, emerging stock funds and bonds suffered net redemptions for nearly $60 billion according to EPFR Global. Capital flight has been partially stopped this year. The devaluation of dollar was not. More to the merits of the latter, to be honest. With the end of Quantitative Easing, the macro data that confirm the strength of the recovery in capital flows to the United States are intensifying. Last week, just to mention the fact, US equity funds recorded net inflows of 14.7 billion dollars – the best weekly performance since the beginning of the year.
The context makes the currency less sustainable is the external debt of emerging countries that may be a real unexploded bomb bequeathed by the exuberant US monetary policy.
The most exposed countries
The case of Russia is the most emblematic. The foreign currency debt in the last three years has grown by 34% and is now worth 728 billion dollars (34.8% of GDP). The country’s gross international reserves reached 509 billion dollars, guaranteeing it 13 months of battery life. The situation is not alarming if it were not for the lethal conjunction of growing debt and currency devaluation. Much more desperate the situation is in Ukraine. The country has 136 billion of debt in foreign currency. In relation to GDP it is 74.7%, but it is estimated that this year it will get to 115.7%. An unbearable burden if you think that the national currency since the beginning of the year has lost 43% against the dollar. “The combination of strong deficit of low current, low reserves and high external debt is particularly burdensome for the country,” observed Alexander Terzulli, economist of the SACE.
The problem also applies to countries that have nothing to do with oil and war. Take Turkey. The state and its companies have a foreign debt at 47.3% of GDP (it was 39.4% in 2011): the decline of the Turkish lira (-8.74% against dollar from the highs of 2014), therefore, it hurts businesses and indebted banks. It brings Brazilian companies 8.15% of devaluation of the real since beginning of the year, as the foreign currency debt rose from 16.3% of GDP in 2011 to 21.6% in 2013 and is expected to hover around 23, 1% in 2014. And problems can arise from many parts of the world, from Indonesia to Romania and South Africa.