By Serkan Arslanalp and Takahiro Tsuda
There are a trillion reasons to care about who owns emerging market debt. That’s how much money global investors have poured into in these government bonds in recent years —$1 trillion. Who owns it, for how long and why it changes over time can shed light on the risks; a sudden reversal of money flowing out of a country can hurt. Shifts in the investor base also can have implications for a government’s borrowing costs.
What investors do next is a big question for emerging markets, and our new analysis [link to wp] takes some of the guesswork out of who owns your debt. The more you know your investors, the better you understand the potential risks and how to deal with them.
Some of the facts
We compiled comparable and standardized estimates of the investor base of emerging markets’ government debt using the same approach we designed last year to track who owns advanced economy government debt.
We use data from 24 emerging market countries and we’ve made it available for anyone interested in further research [add hyperlink to data] (Figure 1). The data covers the period from 2004 through June 2013.
By our estimates, half a trillion dollars in foreign investment poured into emerging market government bonds from 2010 until 2012 alone, most of it from foreign financial institutions that aren’t banks (large institutional investors, hedge funds, sovereign wealth funds). These investors held about $800 billion of the debt—80 percent of the total—at end-2012.
We also calculate that foreign central banks held about $40 to $80 billion of the debt, and their holdings appear to be concentrated in seven countries: Brazil, China, Indonesia, Poland, Malaysia, Mexico and South Africa.
Why this money poured in to emerging market economies over the last decade is partly related to improvements in public debt management. In particular, emerging markets have extended the maturity of their debt profile, cut down issuance of floating rate debt, and reduced foreign currency debt. This made their public balance sheet more resilient to exchange rate and interest rate shocks, and reduced risks on the supply-side of government debt. Partly as a result, foreign interest in emerging market government debt rose sharply in recent years.
Rising foreign participation in emerging market government debt markets creates opportunities and new risks, including on the demand side. Rising foreign participation in government debt markets can help reduce borrowing costs and spread risks more broadly among investors, but it can also raise external funding risks for countries.
Moreover, having a view of investors across countries is essential for understanding the dynamics of global demand for government debt. Changes in global investor’s allocations among countries are important because they can affect many countries all at once.
IMF
