Forum warns of economic risks
Some are warning of an expansion of carry trades by multinational companies, particularly in emerging markets, while others warn of new crises for highly leveraged Asian companies as monetary policy starts to tighten.
Shin Hyun-song, senior economist for the Bank for International Settlement (BIS) and a Princeton University professor, is warning about increasing carry trades by companies in emerging markets if the U.S. greenback strengthens as interest rates rise.
At a forum titled “Strengthening Growth Potential in the Aftermath of the Global Financial Crisis” hosted by the Bank of Korea at its headquarters in downtown Seoul yesterday, Shin said the role played by banks has shrunk since the global financial crises that began in late 2008 because they have cut back on lending. At the same time, the role of multinational companies in financial markets has risen.
Shin said multinational companies have become quasi-financial institutions by securing capital through offshore bonds issued by their overseas operations.
He said global investors, including asset managers, have increased their investments in foreign bonds issued by companies in emerging markets including China, India and Brazil, particularly since 2010.
Investors are trying to profit from the greater growth potential of emerging economies.
Instead of using the dollars they raise from bonds to expand their businesses or buy assets, multinational companies in emerging markets have been engaged in the so-called carry trade: taking capital raised from offshore bonds and buying financial products in their own countries’ financial institutions, which offer high interest rates.
A problem, Shin said, could arise at a time of crisis. If the U.S. dollar strengthens, it could increase the debt burden of multinational companies while their investments in financial products in their own countries will shrink as the value of their home currencies declines.
The dollar is now weak against many currencies, including the Korean won. This is particularly so as the U.S. Federal Reserve maintains a near-zero interest rate policy. But the tide will turn when the Fed decides to raise interest rates and the dollar will appreciate.
Meanwhile, Rhee Chang-yong, director of the International Monetary Fund’s Asia-Pacific Department, said at the forum that although it may be difficult for Asian economies to repeat the rapid growth of the past, the region is likely to enjoy the fastest and most robust recovery in the world.
However, he said, some Asian countries have excessively high debt and companies whose debt ratios continue to grow.
Rhee said that when central banks tighten their monetary policies by raising interest rates, companies that are at their limits will go bankrupt.
In an opening speech at the forum, Korean central bank Covernor Lee Ju-yeol said central banks have to be assertive in their role of keeping financial markets stable and contributing to sustainable economic growth.
The Bank of Korea governor said each central bank, particularly from the major economies, has to make a smooth transition in normalizing its monetary policy for the world’s economy to enjoy sustainable and solid growth.
Noting that the growth momentum in emerging markets has been weakened while advanced economies are on a recovery path, he said there are still concerns over the possibility of an economic slowdown and financial instability in emerging markets in the process of advanced economies’ monetary policy normalization.
Pointing out the slowing growth in China and potential deflation in Europe as a possible risk that may derail the recovery momentum, Lee emphasized the need for stronger cooperation and communication among economies. He said now is the time to think about fundamental problems that could prevent sustainable growth, such as aging populations.
BY LEE HO-JEONG [email@example.com]