IMF Flashes Warning Lights for $18 Trillion in Emerging-Market Corporate Debt

"Emerging markets should brace for a rise in corporate failures as a debt-bloated firms struggle with souring growth and climbing borrowing costs, the International Monetary Fund warned Tuesday in a new report.

From sugar firms in Brazil to pipe makers in Russia, firms in developing countriesbulked up on cheap debt as central banks gassed the easy-money pedal in the wake of the financial crisis.

Then, emerging markets were the drivers of global growth. Developing-country firms quadrupled their borrowing from around $4 trillion in 2004 to well over $18 trillion last year, with China accounting for a major share.

Now, prospects in industrializing economies are weakening fast even as the U.S.Federal Reserve is getting set to raise interest rates for the first time in nearly a decade, a move that will raise borrowing costs around the world. The burden of 26% larger average corporate debt ratios and higher interest rates come as commodity prices plummet, a staple export for many emerging-market economies. Compounding problems, many firms borrowed heavily in dollars. As the greenback surges against the value of local currency revenues, it makes repaying those loans increasingly difficult.

That massive debt build-up means it is “vital” for authorities to be increasingly vigilant, especially to threats to systemically important companies and the firms they have links to, including banks and other financial firms, the IMF said.

“Emerging markets should also be prepared for the eventuality of corporate failures,” the fund said. “Where needed, insolvency regimes should be reformed to enable rapid resolution of both failed and salvageable firms.”

Besides the petroleum sector, where borrowing didn’t anticipate the nosedive in prices, the construction industry is particularly exposed to the changing business climate, the IMF said.

Worried about the building risks, investors have been selling out of many emerging markets, pushing down equity and exchange-rate prices, and pushing up borrowing costs. That market turmoil is exacerbating their economic woes.

In Latin America’s six largest economies, for example, the average growth rate has fallen from 6% in 2010 to around 1% this year. Brazil’s central bank last week said the country’s recession is far worse than expected.

To help guard against building risks, the IMF said policy makers should introduce stronger financial regulations such as higher cash buffers for exchange-rate exposures and conduct stress tests to weed out problem firms..."

at http://blogs.wsj.com/economics/2015/09/29/imf-flashes-warning-lights-for-18-trillion-in-emerging-market-corporate-debt/?mod=WSJBlog