Daily Management Review

S&P warned about vulnerability of Asian and Latin American companies


12/16/2016


Analysts are observing significant increase in bond yields around the world, similar to that happened during the global financial crisis. This trend is making companies in Asia and Latin America the most vulnerable, since their debt burden has significantly increased during the last decade. This is stated in S&P Global Ratings review.



ProjectManhattan
ProjectManhattan
The international rating agency admits that this is the worst case scenario. However, it has become more actual after victory of Donald Trump in the US presidential election. This even has caused a rise in the cost of borrowing in the world.

Yield on 10-year US government bonds this week has reached 2.5% for the first time since October 2014, says Bloomberg.

"The long-term yield curve can very quickly become steeper. At that, spread for some issuers with low ratings could expand significantly" - believe analysts of S&P GR.

Businesses around the world will annually have to spend additional $ 184 billion to service their debt if yields rise by more than one-third - to levels that were observed during the time of the 2008-2009 global financial crisis period. This follows from stress test results of more than 3,000 companies, conducted by S&P GR.

At that, borrowers in emerging markets will be hit the most, as they will have to pay annual $ 200 billion by 2020, estimates JPMorgan Chase & Co.

"Rather than take an opportunity to reduce the debt burden, companies increased share of loans to assets, - the S&P GR. - This debt overburden increases borrowers’ vulnerability to sudden spikes in interest rates."

In 2016, emerging markets have been in pole position since policies of central banks of the advanced economies lower profits in these regions. Ian Dehn, investment manager at Ashmore, says: "Emerging economies are only countries in the world that can be called normal: normal monetary policy and normal interest rates."

This explains attention with which investors are watching the dollar and the US Federal Reserve's plans, as companies and the economies of developing countries are investing heavily in debt instruments denominated in the reserve currency. Since long period of low interest rates could not trigger economic growth in developed countries, it is necessary to take measures in the field of taxation. This makes prospects for emerging markets not so clear. Paul McNamara, director of investment at GAM Company, says: "Just one piece of good news, and the dollar will rush up."

Ian Dehn, however, does not quite agree with him. He believes that a strange situation in the monetary sphere, prevailing in the global economy, can go for the benefit of emerging markets. "If we assume that global capital will drift towards the emerging markets, very interesting things can occur in the economy, - he says, pointing to the fact that the turnover of capital, strong national currency, cheaper imports and lower prices will reduce inflation. - We will see a simultaneous decline in inflation and economic growth."

source: ft.com, bloomberg.com






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