How Risky Are Emerging Market Currencies? (w/ Rashique Rahman & Ed Harrison)
RASHIQUE RAHMAN: Yes, it's still the case that when things go awry, one of the safest havens is the US dollar. ED HARRISON: There's a reflectivity there in terms of heightening the crisis, because therefore, you have the risk. One of the risks, just to go back to your whole theme about EMs, one of the risks I would imagine is in terms of the balance sheet, that is when we spoke before, you were telling me these corporates are not necessarily hedged. To the degree that they're unhedged, that means that their liabilities in a crisis situation would be increasing because the dollar value would be increasing, and their assets are stagnant or potentially decreasing so the positives that you were talking about from the asset liability perspective become skewed in the negative direction. RASHIQUE RAHMAN: That's a great point. It's the interplay of two of those legs in a sense. The balance sheet with the dollar dynamics. You can get an adverse outcome, it could go either way depending on the direction of the dollar, but if the dollar strengthens, you see have this adverse balance sheet outcome. What you've seen in the EMs over the last five, seven years is this advent of the currency trades, so to speak, so they borrow in dollars and denominated in local currency. You can't carry at a hedge. It's too costly, just too costly in domestic terms. You saw a lot of that five years ago, and there were a couple of disruptions in the corporate space as a result of that. I think EMs have learned the lesson and so you've seen policymakers particularly clamping down on net open dollar positions and things like that, but you still see-- from my work, you still see significant open dollar positions meaning if the dollar strengthens, you're going to get an adverse balance sheet impact from that movement. That's still prominent in EM, and that's part of the dollar dynamic equation that's going to lead to a tightening in financial conditions and have adverse impacts on aggregate demand and growth conditions in EMs. That's a big, big issue for EM still. It's decreased, I'd say, over the last 10 years but it's still an issue. It varies by jurisdiction by sector and things like that, but in aggregate, it's still a problem for EMs. ED HARRISON: Now, obviously, when we're talking about the whole dollar dynamic, the Fed is the lender of last resort in US dollars. They're on the hook to a certain degree if there's a liquidity crisis. My question is are there other central banks, let's say, the Bank of China, the People's Bank of China, that could potentially through swap lines with the US, Central Bank provide liquidity and therefore, bail out, if you will, corporates out of a liquidity crisis without the Fed specifically provisioning liquidity to those central banks? RASHIQUE RAHMAN: Yeah, it could be. We've seen that on a limited basis where there'd been liquidity constraints or concerns in some countries, China would negotiate with other countries to provide some liquidity provision, not without conditions, of course. We could see more of that. Trying to tap their 3 trillion of dollar reserves for example, I could see that as a possibility. We got to think about the cascading impact of all this dollar issuance. EM corporates have issued a lot in the last 10 years. You think they're on the hook for that? No, absolutely not. The governments are ultimately on the hook. It's a contingent liability for the governments. If corporates in their jurisdiction get into trouble, they're on the hook by providing dollar liquidity through their central bank FX reserves for example or other mean, macroprudential provisions through the banking system, other mechanisms like that. It's the government's that are on the hook for that. Who's on the hook for the governments? It's the Fed ultimately, that's on the hook for that. That's the Fed that's going to have to provide that liquidity if and when we get into a situation where their dollar access constraints. That will happen, it's just a question of when and how that happens. It's hard to time that and foresee that exactly happening, but it will happen and the Fed's going to be on the hook for that. ED HARRISON: The preconditions for it happening right now, in your view, are not present. When you were talking about the balance sheet earlier, you were largely positive. RASHIQUE RAHMAN: I don't see that as an imminent risk. Famous last words. Look, like I said, I call it like I see it. I've been, repression and a lot of these disruptive outcomes that we've seen in markets. I don't see it as an imminent threat or concern, partly because central banks, policymakers have learned their lessons, so to speak, from the past, in a way and I think they're very much attuned to these disruptions in money markets and the funding markets let's say, and I don't see any signs of stress there. Of course, what happened to repo markets is an example of it, but in a broad sense, I haven't seen signs of it. I don't necessarily see that as an imminent risk, but it's out there. It's certainly out there. JUSTINE: If you're ready to go beyond the interview make sure you visit realvision.com where you can try real vision plus for 30 day for just $1. We'll see you next time right here on real vision.