Original Sin Redux Asia School of Business-SEACEN webinar series on - PowerPoint PPT Presentation

Original Sin Redux Asia School of Business-SEACEN webinar series on macro, finance and emerging markets Hyun Song Shin*, Economic Adviser and Head of Research, BIS 14 May 2020 *The views expressed here are mine and not necessarily those of the Bank for International Settlements

Borrowers Investors A’s currency A L A L Country A 3

Finding 1: lenders tend to lend in their own currency Borrowers Investors A L A L A L A’s currency Country A Maggiori, Neiman and Schreger (2018) “The rise of the dollar and fall of the euro as international currencies” 4

Finding 2: private sector borrowers are subject to “original sin”; when borrowing from abroad, they do so in foreign currency Borrowers Investors A L A L A L A’s currency Country A A L 5

Canadian corporate bond issuance Maggiori, Neiman and Schreger (2018) “The rise of the dollar and fall of the euro as international currencies” 6

Finding 3: exception is the US and the US dollar Borrowers Investors A L A L A L US dollar USA A L 7

US corporate bonds issuance Maggiori, Neiman and Schreger (2018) “The rise of the dollar and fall of the euro as international currencies” 8

Liabilities side of lender’s balance sheet looms into view Borrowers Investors A L Pension funds and life insurers have bond-like obligations; they want assets that back them up A L A L A’s currency Country A A L 9

Lessons from 1990s EME financial crises l Avoid currency mismatch l Avoid maturity mismatch 10

Overcoming original sin: non-resident holdings of EME local currency sovereign bonds % Source: World Bank 11

Two duration measures dP / P Duration = − dr l Compare duration measures with: § Percentage return in local currency terms § Percentage return in dollar terms 12

Percentage return 0 Yield change 13

EMEs local currency sovereign bond returns 1 , January 2013 – October 2018 Mexico South Africa y = -0.01 -5.05x y = 0.03 -4.59x where R 2 =0.88 where R 2 =0.94 5 5 Return, in percent Return, in percent 0 0 –5 –5 y = -0.06 -12.4x y = -0.02 -12.8x where R 2 =0.58 where R 2 =0.70 –10 –10 –0.5 0.0 0.5 1.0 –0.5 0.0 0.5 1.0 Change in yield, in percentage points Change in yield, in percentage points Local currency return US dollar return 1 Total return on bonds denominated in local currency as weekly change in JPMorgan GBI-EM principal return index in local currency and US dollar. Sources: JPMorgan Chase; BIS calculations. 14

EMEs local currency sovereign bond returns 1 , January 2013 – October 2018 Indonesia Brazil y = -0.01 -4.52x y = 0.04 -4.34x where R 2 =0.88 where R 2 =0.93 5 5 Return, in percent Return, in percent 0 0 –5 –5 y = -0.09 -6.6x y = -0.11 -8.52x where R 2 =0.60 where R 2 =0.66 –10 –10 –0.5 0.0 0.5 1.0 –0.5 0.0 0.5 1.0 Change in yield, in percentage points Change in yield, in percentage points US dollar return US dollar return 1 Total return on bonds denominated in local currency as weekly change in JPMorgan GBI-EM principal return index in local currency and US dollar. Sources: JPMorgan Chase; BIS calculations. 15

Advanced economies sovereign bond returns 1 , January 2013 – October 2018 France Sweden y = -0.03 -5.41x y = -0.03 -5.09x where R 2 = 0.96 where R 2 =0.94 2 2 Return, in percent Return, in percent 0 0 –2 –2 –4 y = -0.06 -2.67x y = -0.12 -1.91x where R 2 =0.02 where R 2 =0.01 –4 –6 –0.2 –0.1 0.0 0.1 0.2 0.3 –0.2 –0.1 0.0 0.1 0.2 0.3 Change in yield, in percentage points Change in yield, in percentage points Local currency return US dollar return 1 GBI Global Country 5 to 7 year maturity indices forthe selected economies. Sources: JPMorgan Chase; BIS calculations. 16

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Covid-19 shock 18

Foreign ownership in EME local currency bond markets 19

US dollar and local currency returns vis-à-vis yield changes 20

US dollar and local currency returns vis-à-vis yield changes (cont) 21

Exchange rates co-move with bond yields in EMEs 22

EME FX reserve buffers 23

Monetary policy frameworks in EMEs: BIS Annual Economic Report 2019, Chapter II 24

Q & A SESSION Please use the survey link in the chat box or the QR code to suggest any topics of interest you might have that ASB-SEACEN can address. https://bit.ly/OriginalSinRedux

Mas aster of Central al Ban anking starts June 2021 To learn more about ASB visit https://asb.edu.my and if you are interested in our Master of Central Banking program visit https://asb.edu.my/academic- program/master-of-central-banking