China Research

Emerging markets are usually more sensitive to weak current account balances than advanced countries. A deficit in the balance on current account urges for a currency inflow since it implies a debt for imports vis-a-vis other countries that has to be paid. This inflow can be done in the three following ways:

¤ by receiving currency reserves via foreign direct investment (which often does not work as an available or sufficient financial source),

¤ by borrowing money in foreign currency (mostly in U.S. dollar, USD), or

¤ by selling stocks, bonds, etc to foreign investors (if such financial products exist in the emerging country and foreign demand for these papers is there).

Statistics show that emerging markets borrow the lion share of their foreign credits in USD which may be challenging in times when the American dollar is strong on global currency markets. This is actually the case. Serving existing debt in USD uses to be even much more challenging.

By the way: During a meeting the other day with American financial analysts, I heard the view that the USD historically tended to be strong when investments in research and development (R&D) in the U.S. were high. This is explained by an increasing demand for American technology stocks and also foreign action for FDI in the U.S., thus leading to a high demand for the dollar and therefore to the strengthening of the American currency. I am not quite sure about the general validity of this suggested correlation. But it can be observed that such conditions can be found these days.

Back to emerging markets. What we can see today is an increasing willingness of certain emerging markets to avoid or decrease new borrowing in USD. However, this is not easy to achieve since USD markets function by far as the biggest global supplier of new loans, also to emerging markets. 

The ongoing situation with the strong dollar is, of course, particularly difficult for emerging countries with high indebtedness in USD. Such countries may be found in all continents – countries that are or have been reporting growing pressure on their currencies in 2024 such as the Nigerian Naira, the Egyptian Pound, the Turkish Lira, the Indonesian rupee, the Argentine peso or the Brazilian real (watch for this the following IMF table: https://stats.bis.org/statx/srs/table/e2?m=USD). Of course, some of these and other weak currencies of emerging markets have also been impacted by other negative factors than the strong dollar, for example domestic political ones.

At the same time, there are also countries trying to reduce their exposure to the dollar (which also can be seen in the IMF table quoted above). Indonesia is such an example. However, such a trend will not be easy to achieve – but Thailand actually managed it in the past few decades. Perhaps another option may gain momentum as it is currently the case in South East Asia, i.e. trying to expand borrowing within the region at the expense of the USD.  

Conclusion: Analysts of emerging markets should watch the further development of the USD and its impact on indepted emerging markets.

Hubert Fromlet Affiliate Professor at the School of Business and Economics, Linnaeus University
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