A stronger Dollar

The real worry is the $9 trillion global Dollar borrowing…

As the Fed moved in to indicate a timetable for rate hikes, there were concerns over capital outflows from emerging markets into the US. While that could happen, it would be a smaller problem to contend with. The real problem is the $9 trillion debt that global companies and governments owe in dollars. Let us understand why…

How a stronger DD intimidates…

Let us take the example of an Indian company which borrows $1000 from the US market at 1.5% interest when the exchange rate is at Rs.50/$. The company thus brings in Rs.50,000/- into India. At the end of 5 years, the Indian company will have to repay $1075 (for the sake of argument). But let us assume that the dollar has appreciated by then to Rs.70/$. So it has to repay Rs.75,250/- The dollar cost over 5 years may have been 7.5% but the rupee cost over 5 years has been over 50%. But first the genesis of this dollar borrowing mania in emerging markets.

How the dollar mania began…

Dollar debt in the non-US world grew five-fold from $2 trillion in 1995 to $9 trillion in 2014. Within this pack the one that stands out is the dollar borrowings of emerging markets between 2009 and 2014. During this period, emerging market dollar debt swelled from $2 trillion to $4.5 trillion. The reasons are not far to seek. Countries like Brazil, South Africa and Turkey, which run perpetual current account deficits, heavily relied on dollar borrowings to bridge the gap. With the dollar weak and interest rates extremely low, borrowing in dollars almost seemed like a no-brainer. The impetus came from dollar holders too. With US investments giving almost nil returns, the obvious choice was emerging market debt, which was more lucrative. So whether it was Gazprom or Petrobras or the Jaypee group in India, the logical choice was to borrow in dollars. And thus the dollar pie got bigger and bigger.

What does it actually mean?

The problem has assumed gigantic proportions in the last one year. Since June 2014, the dollar index (DXY) has appreciated from a level of 78 to 102, an appreciation of over 26%. As long as global companies have dollar exports to balance these dollar payments, it may get neutralized. But Indian groups like the Lodhas and the Jaypee group can hardly claim dollar export receivables. Companies like Petrobras and Gazprom have another problem because oil prices have also crashed by over 60%.

This is the major worry if the US Fed starts hiking rates. A rate hike will make the US dollar stronger and US debt more expensive. For export companies, with a compensatory benefit from a strong dollar, it may be ok. The rest of them will have a lot of thinking to do! ©

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