1. Page 1 of 2
Economic Commentary
QNB Economics
economics@qnb.com
March 23, 2014
Foreign Ownership of Debt is an Important Indicator of Vulnerability
to the Emerging Market Crisis
Since the announcement by the US Federal
Reserve (Fed) of the gradual reduction of its
asset-purchasing program—the so-called
tapering of Quantitative Easing (QE)—
emerging markets (EMs) have witnessed large
capital outflows and a strong weakening of
their currency. A new IMF study sheds light on
why some countries are particularly
vulnerable, given that a large portion of their
debt is in the hands of foreigners. The study
underscores that a number of countries are
particularly vulnerable, including Argentina,
Egypt, Poland and Ukraine.
The IMF study estimates total government
debt of the major 24 EMs to be USD9.6tn at
end-June 2013. Of this amount, government
debt held by foreign institutions was around
USD1.4tn or 14.6% of the total government
debt. Around 80% of this was held by foreign
asset managers (large institutional investors,
hedge funds, sovereign wealth funds). The
study further estimates that more than half
(USD800bn) of EM government debt held by
foreign institutions has flowed in since 2010.
Stronger inflows were most probably a
consequence of near-zero interest rates across
advanced economies, which made higher
sovereign yields in EMs attractive. The inflows
were also less selective across EMs following
the global financial crisis. The study suggests
that this was because most EMs were
relatively unscathed by the crisis, recovering
quickly and their high growth perpetuated
expectations for further currency appreciation.
This came to an abrupt end in May 2013 as the
gradual reduction in QE raised the prospect of
higher interest rates in advanced economies,
thus reversing the capital flows into EMs. This
has revealed the vulnerabilities of EM markets
to capital outflows, particularly those with
large current account deficits and high foreign
debt ownership. A number of EM currencies
proved vulnerable to capital outflows in the
second half of 2013. Since then, investors have
started to differentiate more, with Argentina
and Ukraine particularly badly hit, while Egypt
and Poland have weathered the EM crisis
better so far.
EM Currencies with High Foreign Ownership
(Index, Jan. 1, 2013 = 100)
Sources: Bloomberg
The IMF study examined a scenario in which
foreign private investors maintain their
exposure to EM sovereigns at the same level. It
found that Egypt and Poland would require
government funding of more than 3% of bank
assets. The IMF examined a second scenario in
which private investors roll over only 50% of
government debt holdings maturing in a year.
Mar-14
Egypt
Poland
Ukraine
90
100
110
120
130
140
150
160
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14
-21%
-9%
-61%
2%
Argentina

2. Page 2 of 2
Economic Commentary
QNB Economics
economics@qnb.com
March 23, 2014
In this case, Argentina and Ukraine would also
become sensitive to foreign outflows.
The IMF analysis has proved itself relevant in
recent months with the currencies of
Argentina, Ukraine and, to a lesser extent,
Egypt all succumbing to vulnerabilities.
Argentina and Ukraine both have relatively
high foreign ownership of government debt
(30% and 46% respectively) and have faced
severe currency weakness. Meanwhile, Egypt
has a lower level of foreign ownership (13%)
and has not experienced such a severe
depreciation.
The Argentinean economy has been blighted
by burdensome debt, weak growth and high
inflation, resulting in a steady weakening of
the Argentine Peso for a number of years. This
accelerated into a full-blown collapse in
January 2014 as international reserves fell to
unsustainable levels.
Political instability in Ukraine eroded
confidence in its currency in early 2014.
Russia’s military intervention in Crimea
heightened tensions more recently and led to
further capital outflows and a sharp
weakening of the currency. This is likely to
continue unless a political solution to the
Crimea crisis is found.
In Egypt, low levels of foreign debt ownership
mean that capital flight has been lower,
making it easier for the authorities to support
the currency. In addition, significant GCC
grants in 2013 have helped the government to
reduce its reliance on foreign investors buying
its debt. This has helped maintain a relatively
steady exchange rate of the Egyptian Pound
during late 2013 and early 2014,
notwithstanding major political developments.
Despite high foreign ownership of government
debt in Poland (50%), the currency has
performed well as the economy is growing
strongly and overall government debt is
falling. However, should the economic
situation turn sour, foreign ownership
provides an important indicator that the
country would be vulnerable to capital
outflows.
Overall, the IMF study provides an interesting
new insight into the ongoing development of
the EM crisis associated with QE tapering. It
suggests that both large current account
deficits and high foreign ownership of
government debt can be key indicators of an
EM vulnerability to continued capital flight.
Contacts
Joannes Mongardini
Head of Economics
Tel. (+974) 4453-4412
Rory Fyfe
Senior Economist
Tel. (+974) 4453-4643
Ehsan Khoman
Economist
Tel. (+974) 4453-4423
Hamda Al-Thani
Economist
Tel. (+974) 4453-4646
Ziad Daoud
Economist
Tel. (+974) 4453-4642
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