Emerging Markets’ Hidden Debt Risk
As the COVID-19 crisis continues, understanding the extent of emerging-market firms’ unhedged foreign-currency borrowing will be critical. Central banks and regulatory agencies, which have access to such data, should use it to anticipate the damage arising from currency depreciations and design policy responses accordingly.
WASHINGTON, DC/LONDON – Stark warnings about the COVID-19 shock’s potentially devastating effects on emerging markets (EMs) have become ubiquitous. With the pandemic engulfing ever more countries, EMs face a mass exit by foreign investors seeking safe assets. As a result, capital outflows and currency depreciations have become unprecedentedly synchronized.