Category: Fixed Income/Interest Rates, Think Tank

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One Response to “The global long-term interest rate, financial risks and policy choices in EMEs”

  1. ac-is says:

    Here’s my take on summarizing the article and its implications, I could be totally off .. but here it is..

    To sum up, Emerging market corporations have borrowed cheaply from foreign banks over the past few years and servicing the debt wasn’t much of a problem due to appreciation of their local currency. Additionally, because those corporations generally borrow from foreign banks due to low interest rates, local banks had to look for a different source of revenue, hence stimulating demand for small local businesses.

    However, that might all be coming to an end as EM currencies have depreciated significantly throughout 2013 and into 2014 as advanced economies are expected to start raising rates. EM corporations servicing their foreign debt could see a decline profits due to the depreciation of their local currency. To top it off, as EM corporations start reverting back to local debt, many small businesses will face huge competition in terms of debt financing which could stifle the local EM economy.

    This in turn could have a huge impact on both advanced and EM economies as most advanced economies are currently re-balancing their deficits via EME surpluses. If EME slows down significantly due to the above mentioned reasons, then a reduction in demand for goods and services from the advanced economies could cause the current recovery to stall.