Vulnerability on the Rise in Some emerging Markets
Author | Laura Kodres |
Position | IMF Monetary and Capital Markets Department |
Pages | 185 |
Page 185
Although emerging markets have not felt the recent financial market turbulence as much as developed economies have, some emerging market countries may be vulnerable to a decision by investors to pull back capital, the IMF said in its Global Financial Stability Report (GFSR). This vulnerability may continue after funding problems in more mature markets subside, the twice-yearly report said.
Overall, emerging market risks are balanced between slightly lower sovereign risks because of their generally good economic fundamentals and "rising risks in some economies experiencing rapid credit growth and increasing reliance on flows from international capital markets."
Reflecting the same weakening in credit discipline that has led to problems in mature markets, "private sector borrowers in certain emerging markets are adopting relatively risky strategies to raise financing. Most noticeably, in some countries in Eastern Europe and Central Asia, banks are increasinglyusing capital markets to help finance credit growth," the report, released on September 24, said.
Although the indicators suggest that banking systems in emerging markets are profitable and well capitalized, and have diverse sources of earnings and sound asset quality, credit issues "warrant increased surveillance as circumstances vary considerably across countries.
Authorities in some emerging markets need to ensure vulnerabilities do not build to more systemic levels." The GFSR highlights areas that warrant increased surveillance in some emerging markets:
* The growing market for privately placed syndicated loans for corporations that in some cases "may allow issuers to avoid the more extensive disclosures required by public listings."
In some cases, credit discipline appears to be declining, with weaker credits and more first-time issuers becoming involved in the high-yield debt market.
The private placement market has grown rapidly in emerging Europe, the Middle East, Africa, and, to a lesser extent, Asia, "partly at the expense of public bond and equity markets."
* Rapid domestic credit growth funded by foreign borrowing, mainly "in emerging Europe and central Asia, which now absorbs nearly half of all international bank and bond financing." Foreign financing "has enabled banks to increase liabilities more rapidly than the expansion of local deposits would allow," but it puts at risk, especially, lower-rated...
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