The volatility that has rocked financial markets since the start of the year is likely to continue, the ‘bank for central banks’ has warned.
The strength of the dollar is leading many emerging market economies to start paying off their dollar debts – deleveraging – in response to the strengthening of the dollar. A strong dollar means it harder to repay borrowed dollars if sales revenue or income is in a different currency. It leads to so-called currency mismatches.
Jaime Caruana, general manager at the Bank for International Settlements (BIS), said that these shifting global financial conditions, along with maturing financial cycles in a number of emerging economies, were helping to drive the current combination of disappointing economic growth, large shifts in exchange rates and sharp falls in commodity prices.
“Based on the most recent reading for the third quarter of 2015, global liquidity conditions may have begun to tighten for emerging economies," said Caruana told an audience at the London School of Economics today.
"A key yardstick [for global liquidity] is the US dollar-denominated debt of non-bank borrowers outside the United States."
Total dollar borrowing from non-banks outside the US was $9.8 trillion (£6.7 trillion) in September 2015, unchanged from the previous reading in June. The dollar borrowing by non-banks in the emerging economies stood at $3.3 trillion, again unchanged from June.
"This is the first time since 2009 that the latter has stopped increasing," Caruana said.
"Cross-border bank lending shows even clearer signs that global liquidity conditions may have peaked for the time being in emerging economies. Cross-border bank lending to emerging economies has slowed considerably, especially to China," he added.
Cross-border lending in dollars to China, Brazil, Russia, South Africa and India shrank by $38bn during the third quarter of 2015 to reach $824bn.
"Just as a weakening dollar encourages greater borrowing in dollars, the stronger dollar recently has resulted in pressure to reduce debt in dollars," Caruana said.
"These transitions and realignments inevitably bring short-term discomfort in the financial markets. They also raise significant risks. But depending on the policy responses, they could eventually allow renewed and, above all, more sustainable and resilient growth, both in advanced economies and in key emerging economies."