Fed rate hike to put pressure on emerging market corporates in 2016
By Tariro Mzezewa
NEW YORK Dec 15 (Reuters) - Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the U.S. Federal Reserve begins what is expected to be a series of interest rate increases after years of easy money policies.
The combination of weakening emerging market currencies, rising U.S. rates and a strengthening dollar could create a "perfect storm" of conditions to lead some emerging market companies to sell assets and others to default in 2016.
"There has been a tremendous amount of emerging market debt issued in dollars over the last decade, yet these same corporations don't have revenue in dollars," Bonnie Baha, lead portfolio manager at DoubleLine Capital told the Reuters Global Investment Outlook Summit in New York in November.
The currency mismatch - lots of dollar-denominated debt and a low percentage of revenues in the U.S. currency - increases the likelihood of a company failing to service its debt, managers said. Some managers say this inability to pay off dollar debt could spark the next emerging market crisis.
Year-to-date, emerging market financial and non-financial corporates as well as sovereign debt issuance totaled $792 billion, according to the Institute of International Finance. MSCI's broadest emerging market index is down 19 percent this year.
"As U.S. liquidity growth continues to slow, those emerging market countries and corporations that are reliant on U.S. dollar capital inflows for funding that have not undertaken the necessary structural reforms will be unable to continue to finance themselves, let alone repay the considerable amounts of U.S. dollar debt that they have accumulated post-financial crisis," said Atul Lele, chief investment officer at Deltec International Group.
Managers who spoke with Reuters said they are reducing allocation to emerging market companies that are heavily exposed to commodities and energy in Brazil, Russia, Turkey and South Africa.
"We've seen this play out before. Last year, when the West put sanctions on Russia, Russian companies couldn't access U.S. and European markets and had to pay debt due in the upcoming year while the rouble was weakening," said Sammy Simnegar, manager of Fidelity Investments' $3.4 billion Emerging Markets Fund. Continuación...