Rating agency Moody’s has said the rapid increase in debt issued by offshore subsidiaries in emerging economies do not represent a significant systemic vulnerability but, rather, a potential risk factor for individual issuers.
The significant depreciation of some emerging market (EM) currencies, forecasts for prolonged muted growth in some economies and an expected tightening of US monetary policy imply that debt issued by offshore subsidiaries could become more expensive to service and refinance, said Marie Diron, a senior vice-president at Moody's and co-author of the report.
The report explores the scale and nature of the risks involved with debt issued by offshore subsidiaries. There was rapid growth in some EMs in recent years and concerns were raised in some quarters about difficulties in obtaining aggregate information.
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At the end of 2014, there were $800 billion of developing countries' bonds redeemable, issued by offshore subsidiaries, 2.5 times as much as five years earlier. China, India, Russia, Brazil and South Africa account for 85 per cent of such bonds by developing countries, 14 per cent of these countries' total bond debt.
With 80 per cent of debt issued by Brazilian and Indian offshore subsidiaries in dollars and a large proportion in euros for Russian subsidiaries, the significant depreciation of some EM currencies over the past year imply the cost of servicing that debt has risen significantly for parent issuers from these countries.
However, given its size in relation to the whole economy and foreign exchange reserves, taking this type of debt into account does not change our assessment of these economies' external vulnerability, said Moody's.
Instead, the risks are issuer-specific. In India, Russia and Brazil, the top 10 bond issuers through offshore subsidiaries account for a little over 70 per cent of total issuance of such debt during the past five years.