June 6-7, 216 International Monetary Fund Spillovers from Dollar Appreciation Florence Jaumotte (with J. Chow, S.G. Park, and S. Zhang)
Motivation Context: appreciation of US Dollar changing growth differentials, asynchronous monetary conditions in advanced economies, terms-of-trade shocks Past episodes of dollar appreciation were associated with EM external crises Question: will it be different this time around? 1
Road map Past episodes of dollar appreciation Country-level balance sheet risks Risks in the corporate sector Conclusions 2
Main findings Risks from USD appreciation: Greater resilience since the mid-199s due to improvement in net IIP and reduced vulnerability to FX changes; and more exchange rate flexibility But reasons for caution: risk of balance sheet mismatches (holders of assets not necessarily holders of liabilities); still large gross positions, in particular leverage in corporate sector; not much information on issuances through offshore subsidiaries 3
Past Episodes of US Dollar Appreciation 4
Past US Dollar appreciations were associated with EM Crises United States: Real Exchange Rates (Index, 21=1) 18 16 14 12 1 8 6 USD appreciation episodes Number of crises¹ (RHS) EUR/USD JPY/USD US REER 8 82 84 86 88 9 92 94 96 98 2 4 6 8 1 12 14 16 Sources: IMF, Information Notice System; International Financial Statistics; Global Data Source Database; Federal Reserve Board of Governors; Catao and Milesi-Ferretti (214); and IMF staff calculations. 1/ EM external crises include external defaults and rescheduling events, as well as the recourse to sizable multilateral financial support (IMF programs), as per Catao and Milesi-Ferretti (214). Note: Higher number implies USD appreciation; EMDE = emerging market and developing economies; REER = real effective exchange rate. 16Q1 8 7 6 5 4 3 2 1 5
EMs with large foreign currency liabilities were more likely to experience a crisis EMs: Select Indicators at the Start of 1995 U.S. Dollar Appreciation Episode (percent of GDP; median values) Net FX assets Net FX debt assets + FX reserves Balance sheet effect 1/ CA/GDP ratio 2/ -5-1 -15-2 -25 Crisis 3/ Noncrisis 3/ Sources: External Wealth of Nations database; Lane and Shambaugh (21), IMF, World Economic Outlook; and IMF staff calculations. Note: FX = foreign currency. 1/ Currency-induced valuation effect of net foreign assets over episode, evaluated over 1995-21. 2/ When 1995 value not available, earliest available value shown: China (1997) and Serbia (1998). 3/ Classification into crisis and noncrisis is based on Catao and Milesi-Ferretti (214). 6
And so were countries with limited exchange rate flexibility 25 2 15 1 5-5 -1 12 1 8 6 4 2 EMDE Non-Fuel Exporter: Real Exchange Rate 1/ Net Capital Flows 2/ (percent) (percent of GDP) Not tied to USD; 1995:Q3 8 Tied to USD; 1995:Q3-8 -6-4 -2 2 4 6 8 1 12 14 16 18 2 Long-term Real Interest Rate 3/ (percent; median) -8-6 -4-2 2 4 6 8 1 12 14 16 18 2 6 4 2-2 4 2-2 -4-6 -8-6 -4-2 2 4 6 8 1 12 14 16 18 2 Real GDP Growth (ppt changes; deviations from 3-year average at t = ) -1 1 2 3 4 5 Sources: IMF, International Financial Statistics and World Economic Outlook; and IMF staff calculations. Note: X-axis represents the number of quarters (t = 1 at the beginning of each episode). EMDE = emerging market and developing economy. 1/ Positive number implies local currency depreciation (cumulative depreciation rate during the episodes). 2/ Net capital inflows (if positive) excluding reserve asset accumulation. Four quarter moving average. 3/ Median of the sample countries. 7
Current depreciation vs. US Dollar tracking the 1995 episode AE vs. EMDE Real Exchange Rate vis-à-vis USD (percent; deviations from t=) 4 AE 1995:Q3 AE 211:Q3 EMDE 1995:Q3 EMDE 211:Q3 35 3 25 2 15 1 5-5 -1-8 -7-6 -5-4 -3-2 -1 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 Sources: IMF, Global Data Source; and IMF staff calculations. Note: AE = advanced economy; and EMDE = emerging market and developing economy. X-axis represents the number of quarters. 8
Patterns in real effective terms are much more varied RER and REER Depreciation (percent) NER and NEER Depreciation (percent) 3 25 2 15 1 5 AE EMDE Fuel exporters 6 5 4 3 2 1-5 211 15 211 15 211 15 211 15 Bilateral RER vis-à-vis USD REER Bilateral NER vis-à-vis USD NEER Sources: IMF, Information Notice System, Global Data Source, and International Financial Statistics; and IMF staff calculations. Note: Positive number implies local currency depreciation (cumulative depreciation rate during the episodes). AE = advanced economy; EMDE = emerging market and developing economy; NEER = nominal effective exchange rate; NER = nominal exchange rate; REER = real effective exchange rate; RER = real exchange rate. 9
Country-level Balance Sheet Risks 1
Data sources on balance sheets External Wealth of Nations (Lane and Milesi-Ferretti, 27 updated) IIP and components (FDI, equity, debt, FX reserves) residency concept (no offshore issuances) Database on International Currency Exposures (Bénétrix, Lane, and Shambaugh, 215) Currency composition of foreign assets and liabilities (total, debt, and FX reserves) No account of hedging through derivatives Limiting assumption: no issuance of domestic currency external debt liabilities for EMDEs Use World Bank Quarterly External Debt Database or national sources to correct this for systemic EMs 11
Net international investment positions have improved Emerging Market Countries: Net IIP Decomposition (percent of GDP; unweighted average) Low-Income Countries: Net IIP Decomposition (percent of GDP; unweighted average) 4 2-2 -4-6 Foreign Exchange Reserves Net Debt Net Equity Net FDI Net IIP 4 2-2 -4-6 -8-1 -8 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13-12 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 Source: Chow, Jaumotte, Park and Zhang (215). Note: FDI = foreign direct investment; IIP = international investment position. 12
China Thailand Malaysia Russia Argentina South Africa Philippines Peru Mexico Chile Brazil India Indonesia Poland Hungary Turkey and have become less vulnerable to FX changes 4 3 Emerging Market Countries: Net FX Foreign Debt Assets Including Foreign Exchange Reserves 1/ (percent of GDP) Median 25th percentile 75th percentile Weighted average 2/ 6 4 Emerging Market Countries: Net FX Foreign Debt Assets Including Foreign Exchange Reserves (percent of GDP) 1995 213 2 2 1-1 -2-2 -4-3 -4-6 -5 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 Source: Chow, Jaumotte, Park and Zhang (215). 1/ Defined as FX debt assets + FX reserves - FX debt liabilities. 2/ Weights are based on GDP in U.S. dollars. Note: FX debt liabilities are adjusted for the share of domestic currency in gross external debt, whenever available. 13
Factors behind improvements in EM balance sheets Improved current accounts and stronger FX reserve accumulation Increased reliance on domestic currency, equity-type liabilities Increased issuance of domestic currency debt instruments 14
But gross positions in some countries remain large -1-2 -3-4 -5-6 -7 Evolution of Gross FX Debt Liabilities (percent of GDP) 213 1995 Source: Chow, Jaumotte, Park and Zhang (215). Note: 1996 value shown for Russia as 1995 value not available. 15
Indonesia India Philippines Malaysia Thailand China Chile Brazil Peru Mexico Argentina Turkey Hungary Russia South Africa Poland And, in some countries, the currency composition of FX debt increases their vulnerability to FX changes 4 Net Foreign Debt Assets by Currency (percent of GDP) USD EUR GBP JPY CHF 3 2 1-1 -2-3 Asia LatAm Other Sources: External Wealth of Nations database; Lane and Shambaugh (21); World Bank Quarterly External Debt Statistics; and IMF staff calculations. Note: FX = foreign currency; IIP = international investment position. FX debt liabilities are adjusted for the share of domestic currency in gross external debt, whenever available. 16
Estimation of balance sheet effects (1) Definition: change in ratio of foreign-currency net debt assets to GDP induced by currency changes Change in exchange rate affects domestic currency value of net debt assets denominated in foreign currency (numerator) Currency movement can also affect domestic currency value of GDP (denominator) through changes in GDP deflator [important correction for high depreciation-high inflation cases] Focus on debt assets and liabilities expressed in the five major currencies (USD, euro, yen, and Swiss franc) Period end-213 until April 215 17
Estimation of balance sheet effects (2) X A R L 1 XR i i 1 i i A i R i L i i Y Ydeflator Y where i denotes foreign currency A i is the domestic currency value of foreign debt assets denominated in currency i R i is the domestic currency value of FX reserves denominated in currency i L i is the domestic currency value of foreign debt liabilities denominated in currency i Y is the domestic currency value of GDP XR i is the bilateral nominal exchange rate relative to currency i (defined as domestic currency per unit of foreign currency) 18
Net balance sheet effects moderate so far in most cases Emerging Markets 15 25th percent 75th percent Median 1 5-5 Total balance sheet effect (% GDP) Debt balance sheet + reserves effect (% GDP) Competitiveness effect (% change in REER) Sources: External Wealth of Nations database; Lane and Shambaugh (21); World Bank Quarterly External Debt Statistics; and IMF staff calculations. Note: FX = foreign currency; IIP = international investment position. FX debt liabilities are adjusted for the share of domestic currency in gross external debt, whenever available. 19
Caveats on balance sheet risks Risk of balance sheet mismatches (holders of assets not necessarily holders of liabilities) Still large gross positions Larger balance sheet effects, rollover and interest rate risks Domestic currency external debt is not without risks Exchange rate risk for foreign investors and risk of sudden stop Not much information on issuances through offshore subsidiaries 2
Trade-offs balance sheet vs. competitiveness risks Countries tied to US Dollar: smaller balance sheet effects, but stronger real effective appreciation which could affect competitiveness E.g. fuel exporters Emerging Asia Countries tied to euro: smaller competitiveness effects but in some cases larger balance sheet effects (dep. on FX composition of debt) 21
Risks in the Corporate Sector 22
Corporate sectors are highly leveraged in some countries Corporate Debt Net Exposure to Foreign-Exchange Risk (percent of GDP) 12 Domestic market debt and bank loans External debt in USD External debt in EUR External debt in other currencies 1 8 6 4 2 Source: Chow, Jaumotte, Park and Zhang (215). 23
Factors for assessment of risks of FX exposure Currency composition of corporate debt Extent of hedging Natural hedges: currency of income streams Financial hedges through derivatives (data limitations) Sectoral differences Nontradable sectors: less natural and financial hedging Maturity structure Shift from bank loans to more corporate bond issuances with longer-term maturity 24
Bulgaria Hungary Mexico Indonesia Turkey Chile Poland Russia Argentina Philippines South Africa Brazil Thailand Malaysia India China Bulgaria Hungary Mexico Indonesia Turkey Chile Poland Russia Argentina Philippines South Africa Brazil Thailand Malaysia India China Natural hedges: currency breakdown of corporate debt and income 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Foreign Exchange Breakdown of Total Corporate Debt (share of total debt) 9% 8% 7% 6% 5% 4% 3% 2% 1% % Foreign Exchange Breakdown of Total Corporate Income (share of total income) LCU Others EUR USD 1% Source: Chow, Jaumotte, Park and Zhang (215). Note: EUR = euro; GBP = British pound; JPY = Japanese yen; LATAM = Latin America; LCU = local currency; RoW = rest of world; USD = U.S. dollar. 25
Weakening Corporate Credit Metrics Debt at Risk 1/ (percent of total debt) Five-year average 213 45 +1% 4 35 3 25 2 15 +11% +6% +15% 1 All EM Latam Asia EMEA Sources: Orbis; and IMF staff calculations. Note: ICR = interest coverage ratio; EM = emerging markets; Latam = Latin America; EMEA = Europe, Middle East, and Asia. 1/ Refers to debt of firms with interest coverage ratios below 1.5. 26
Corporate sector risks Overall, corporate sector risks remain moderate But there are possibilities of greater vulnerabilities emerging as a result of further currency movements Stress test (Chow et al. 215): a combination of severe shocks, in particular earnings and interest rate shocks, would weaken debt servicing capacity and increase debt-at-risk, in some case overwhelming banks buffers 27
Concluding remarks Risks from USD appreciation: Greater resilience since the mid-199s due to improvement in net IIP and reduced vulnerability to FX changes; and due to more exchange rate flexibility But reasons for caution: risk of balance sheet mismatches (holders of assets not necessarily holders of liabilities); still large gross positions, in particular leverage in corporate sector; domestic currency debt also a source of risk; not much information on issuances through offshore subsidiaries Trade-offs between balance sheet and competitiveness effects 28
THANK YOU! 29