ECONOMYNEXT – Sri Lanka and Vietnam have emerged as countries with the highest levels of foreign currency debt and many do not have forex revenues as a hedge, an Asian Development Bank report has warned.
"Corporations in Indonesia, Sri Lanka, and Viet Nam have the highest share of foreign currency debt," the report said.
"Typically, the corporations that have a high share of foreign debt are also highly leveraged.
"This heightens their exposure to the impacts of US dollar appreciation."
In Sri Lanka 48 percent of companies by asset share did not report any forex revenues, the report said.
When a currency falls, the real value of forex debt remains the same, but if revenues are domestic and denominated in local currency can fall. Dollar denominated revenue on the other hand will keep pace.
Usually this is expressed an ‘increase’ in the value of foreign debt or a foreign exchange loss.
In Vietnam 69 percent of firm in the sample (by asset value) that have forex debt, did not report any forex revenues.
In Sri Lanka the number was 48 percent.
The ADB said many Asian nations have ‘loaded up’ on debt while dollar interest rates were at record low with loose Fed policy and weak credit.
The value of foreign currency bonds outstanding, had reached 725 billion US dollars in 2015, up from 242 billion dollars in 2014.
In Asia telecoms and energy firms were among the largest borrowers in forex.
Analysts say in Sri Lanka, state run Ceylon Petroleum Corporation is also among the biggest borrowers of dollar, sometimes done at the instigation of authorities, as a part of measures to delay adjustments in the real economy and trigger balance of payments trouble.
When US interest rates are low, countries find it easier to maintain pegs, leading to more dollar borrowings by firms who imagine currencies will be stable, a process known as liability dollarization.
But many Asian nations (as well as Latin America) have so-called soft-pegged monetary arrangements, where central banks will engage in sterilized forex sales, after suppressing interest rates, leading to precipitous falls against the anchor currency.
Other than Hong Kong (orthodox currency board or hard peg) and Singapore (modified currency board) which do not manipulate interest rates, all other country Asian countries try to mess around with rates to boost ‘growth’ and get into balance of payments crisis and serious economic downturns.
There is no learning curve.
"Policy makers in the region may be forced to respond in kind to the increase in the US interest rate to maintain their domestic financial stability," the ADB said.
"Historically, capital outflows from emerging Asia closely coincide with episodes of rising US interest
"The policy response is necessary to contain destabilizing capital flow reversals, but it constrains action to boost domestic demand and revive growth." (Colombo/Sept22/2015)