Developing countries are moving out of dollar debts and turning to currencies with rock bottom interest rates such as the Chinese renminbi and Swiss franc.
The shift, embarked upon by indebted countries including Kenya, Sri Lanka and Panama, reflects the higher rates set by the US Federal Reserve, which have angered President Donald Trump as well as increasing other countries’ debt servicing costs.
“The high level of interest rates and a steep US Treasury yield curve . . . has made USD financing more onerous for [developing] countries, even with relatively low spreads on emerging market debt,” said Armando Armenta, vice-president for global economic research at AllianceBernstein.
“As a result, they are seeking more cost-effective options.”
But he described many such shifts to cheaper, non-dollar financing as “temporary measures” by countries that had to “focus on lowering their financing needs”.
A switch to renminbi borrowing — which comes as the Chinese currency hits its highest level against the dollar this year — is also a consequence of Beijing’s $1.3tn belt-and-road development programme, which has lent hundreds of billions of dollars for infrastructure projects to governments across the globe.
While overall figures for new renminbi borrowing are not widely available, since Beijing bilaterally negotiates loans with other governments, Kenya and Sri Lanka are seeking to convert high-profile dollar loans into the currency.
Kenya’s treasury said in August it was in talks with China ExIm Bank, the country’s biggest creditor, to switch to renminbi repayments on dollar loans for a $5bn railway project weighing down its budget.
Sri Lanka’s president also told parliament last month his government was seeking lending in renminbi to complete a key highway project that stalled when the country defaulted in 2022.
With the benchmark US federal funds rate at a range of 4.25 per cent to 4.5 per cent — far higher than equivalent rates set by other major central banks — the outright cost of new borrowing in dollars is relatively high for many developing nations — even if spreads for such debt are at their lowest premiums over US Treasuries in decades.
The Swiss National Bank cut rates to zero in June while China’s benchmark seven-day reverse repo rate is 1.4 per cent.
“It seems that the cost of funding might be the reason for conversion into renminbi,” said Thilina Panduwawala, economist at Colombo-based Frontier Research.
Many “Belt and Road” loans of the 2010s were in dollars, at a time when US interest rates were far lower.
The cost for both Kenya and Sri Lanka of such debt has since risen markedly, increasing the incentive to shift away from dollar financing.
By borrowing in currencies such as the renminbi and the Swiss franc, countries can access debt at much lower interest rates than those offered by dollar bonds.
But Yufan Huang, fellow at the China-Africa Research Initiative at Johns Hopkins University, argued that progress for Beijing’s wider efforts to adopt lending in the currency remained limited.
“Even now, when renminbi rates are lower, many borrowers remain hesitant,” he said. “For now, this looks more like a case-by-case operation, as with Kenya.”
Since governments rarely have export earnings in currencies such as the renminbi and Swiss franc, they also may have to hedge their exposure to exchange rates through derivatives.
Panama tapped the equivalent of nearly $2.4bn in Swiss franc loans from banks in July alone, as the Central American nation’s government battled to contain its fiscal deficit and avoid a downgrade in its credit rating to junk status.
Felipe Chapman, Panama’s finance minister, said the access to cheaper financing saved more than $200mn compared with issuing debt in dollars and that the new loans had been hedged.
He added that the country had “diversified” its sovereign debt management into both euros and Swiss francs “instead of relying solely on US dollar capital markets”.
Colombia also appears to be moving towards Swiss franc loans to refinance dollar bonds.
Last week, a group of global banks launched an offer to buy discounted Colombian bonds in what investors saw as part of arranging a Swiss franc loan to the government that would use the existing debt as collateral.
While Bogotá has yet to confirm such a loan, the country’s finance ministry signalled plans to diversify its external currency borrowing in June.
Andres Pardo, head of Latin America macro strategy at XP Investments, said Colombia could borrow at low Swiss-based rates of 1.5 per cent to buy back dollar debts that have yields of 7 to 8 per cent, and local peso bonds paying up to 12 per cent.
The country’s local currency debt was downgraded to junk by S&P that month after the government suspended a key fiscal rule.
Investors said Swiss franc issuance by governments could help limit interest bills, but in the long run such borrowing cannot replace access to the larger public market for dollar bonds.
“They are helpful to underlying fundamentals, if you are cleaning up your maturity profile . . . however, we need to see that policymakers are making improvements to open up [dollar] markets to them again,” said one emerging markets debt fund manager.
Companies in emerging markets are also selling more bonds in euros this year, with the amount of this debt in issue rising to a record $239bn as of July, according to JPMorgan. The overall stock of emerging market corporate bonds in dollars totals about $2.5tn.
“This year’s euro issuance is growing more than we see in dollar issuance,” said Toke Hjortshøj, senior portfolio manager at Impax Asset Management. Asian issuers account for a third of the outstanding euro stock, up from 10 to 15 per cent 15 years ago, he added.
