Chart of the week: 29 June 2018

At least as far as sovereign debt is concerned, there are reasons to be fairly relaxed

Many investors are concerned about the general weakness of emerging-market currencies. After all, a depreciating currency increases the burden of foreign-currency-denominated debt and can result in refinancing problems. As our "Chart of the Week" shows, however, such problems look fairly manageable, at least as far as the sovereign-debt burden of most emerging markets is concerned.

Looking at the major economies, foreign-currency-denominated debt of the public sector remains moderate, compared to gross domestic product. In some countries, that share has even fallen since 2008. Partly, this is because countries have increasingly been able to issue sovereign bonds in local currency. By now, many of the larger emerging markets have been able to establish functioning local capital markets. This has reduced their dependency on foreign-currency financing. In addition, they have accumulated large currency reserves, which could be used to pay back foreign- currency debt, if push comes to shove. Less reassuringly, corporate borrowings have increased sharply in some instances. For several smaller countries with large foreign-currency debts, a strengthening dollar and the rise in U.S. yields, could present some challenges. All this suggests that careful selection is critical. However, it is not an argument against emerging-market bonds in general.