As the dollar soars month after month, the chorus of voices expressing concern about how it will imperil emerging-market companies that borrowed abroad is growing.
India central bank Governor Raghuram Rajan said in February that such borrowing is akin to playing Russian roulette. A few months earlier, the Bank for International Settlements labeled it a “possible source of vulnerability” because the stronger dollar requires borrowers in developing nations to scrounge up more local currency to repay their debts.
While these are logical concerns to express about a market that has tripled over the past five years to $1.4 trillion, they may be overblown.
Here’s why: Two decades after emerging-nation borrowers first regained access to international markets, their makeup remains largely the same today as it was then. Precise breakdowns are hard to come by, but these issuers tend to be companies that generate much of their revenue from exports, giving them a steady stream of dollars that creates a natural hedge against currency devaluations, according to Barclays Plc and Goldman Sachs Asset Management. And many of those who don’t have overseas revenue often buy currency hedges in the derivatives market to protect themselves, they said.
“Are some corporates vulnerable? Absolutely,” said Yacov Arnopolin, an emerging-market fixed income fund manager who helps oversee about $39 billion at Goldman in New York. “But the current narrative tends to be too dramatic around this issue.”
The markets seem largely unfazed by the concern so far.
A Bloomberg gauge of junk bonds sold by developing-nation companies has returned 3.3 percent this year through March 31, compared with an average 0.5 percent return for their global peers. Overall, developing-nation corporate bonds are yielding 5.6 percent. While that’s up about a half-percentage point from a year ago, it’s down from a high of 6.6 percent late last year.
In recent years, bond issuance from emerging markets has come to be dominated by companies as cash-flush governments scaled back their international borrowing.
Analysts and investors break down the market into three categories: borrowers who have dollar revenue; those who have hedged their dollar liabilities; and those who have neither overseas earnings nor hedges.