Macroscope | Emerging markets still committing an ‘original sin’

Emerging markets (EMs) have come a long way since the debilitating debt crises of the 1980s and 1990s.

Developing countries’ economic fundamentals and creditworthiness have improved dramatically, their capital markets have become much deeper while the likelihood of a systemic liquidity or solvency crisis is extremely low.

The EM asset class, moreover, has been a mainstream one for over a decade, underpinned by a much more diverse, knowledgeable and sophisticated investor base.

Indeed one of the oft-cited factors supporting the investment case for EMs is the development of local bond markets which have allowed governments to wean themselves off their addiction to dollar-denominated debt, a phenomenon dubbed the “original sin” by economists.

Yet while EM governments may no longer be sinners, EM companies have been borrowing in dollars like there is no tomorrow.

In one of the most important shifts in global financial markets in recent years, EM companies have taken over from governments as major issuers of dollar-denominated bonds - so much so that that the EM hard currency corporate debt market is now bigger than the highly liquid US high-yield corporate debt market and significantly larger than its European counterpart.