BIS says global liquidity is tightening for emerging markets

08 Feb 2016
Financial Nigeria


The stock of U.S. dollar-denominated debt of non-banks outside the U.S. is an important gauge of global liquidity.

Governor, Central Bank of Nigeria, Godwin Emefiele

According to data from the Bank for International Settlements (BIS), global liquidity conditions may have begun to tighten for emerging market economies (EMEs).

In a lecture presented at the London School of Economics' Systemic Risk Centre, BIS General Manager, Jaime Caruana, gave highlights from the latest global liquidity indicators, a measure of the ease of financing in global financial markets.  

The stock of U.S. dollar-denominated debt of non-banks outside the United States is an important gauge of global liquidity. A statement released by BIS on Friday stated that U.S. dollar-denominated debt of non-banks in EMEs in the third quarter of 2015, remained at $3.3 trillion. Globally, the debt stock stood at $9.8 trillion at the end of September 2015. There was no change from the figure reported at the end of June.

This marked the first time since 2009 that the measure, which is linked to the strength or weakness of the dollar, stopped increasing, the BIS statement said.

"The feedback loop between deleveraging and EME currency depreciation presents challenges that should not be underestimated,” said Mr. Caruana in the lecture, entitled "Credit, commodities and currencies". “That feedback loop has started to impact the broader economy in EMEs now that the dollar has started to appreciate," he said, noting that the strong dollar resulted in pressure to reduce debt in dollars.

The lecture pointed to the close link between debt -- especially in foreign currencies -- and risk-taking.

Mr. Caruana said that these shifting global financial conditions, along with maturing financial cycles in a number of emerging economies, were helping to drive the current combination of disappointing economic growth, large shifts in exchange rates and sharp falls in commodity prices.

The Fed increased short-term interest rates in December 2015 for the first time since 2008. Foreign investors who had sought higher returns in emerging markets as the Fed aggressively cut interest rates, began to take out billions of dollars as the increase in interest rates in the U.S. became imminent.

The net capital flows for emerging markets in 2015 was expected to be negative.  

The slump in global commodity prices have also negatively impacted on reserves, as currencies of EMEs are in turmoil. Central banks in emerging markets have been responding with different measures to stave off the headwinds.

The BIS General Manager said these should not be seen as one-off shocks or headwinds but as reflecting a number of phenomena that have accumulated over time, including policy choices. While these developments present policymakers with significant challenges, they can also be seen as an opportunity to move the global economy onto a more sustainable growth path, BIS said.

"These transitions and realignments inevitably bring short-term discomfort in the financial markets. They also raise significant risks. But depending on the policy responses, they could eventually allow renewed and, above all, more sustainable and resilient growth, both in advanced economies and in key emerging economies," Mr. Caruana stated.

Nigeria, Africa's largest economy, has been challenged by oil price shocks and this period of dollar strengthening that is highly disruptive to emerging markets.

The All-Share Index, the benchmark stock index of the Nigerian Stock Exchange, declined by 17.4 percent in 2015. Foreign reserves are down to $28 billion as the Central Bank of Nigeria (CBN) continues to impose restrictions in the foreign exchange market, while rejecting calls to devalue the local currency.

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