EM Debt Risk: The Devil Is in the Detail

Shamaila Khan

Investors in US dollar-denominated bonds issued by emerging-market (EM) corporates are worried that the greenback’s rise, together with a broad decline in EM currencies, could increase the risk of defaults on their holdings. How worried should they be?

Those now ringing the alarm bells about US currency risk in the EM corporate debt market are doing so because of what they see as the big picture—a systemic risk caused by many companies financing domestic assets with foreign currency liabilities.

Focus on Borrower Exposure

Are they right? In this instance our research leads us to conclude that investors who are focused on the detail—that is, individual borrower risk—may have a better handle on the situation than those who assume that US currency risk applies equally to all EM companies with US-dollar debt.

We conducted a bottom-up analysis of a representative hypothetical portfolio of EM companies that have issued US-dollar debt, and we graded the issuers according to how exposed we considered them to be to the effects of a rising greenback. For the purpose of the analysis we concentrated on nonfinancial companies, where the perceived risk is higher than it is for banks. They fell into four categories:

  • Net positive—that is, companies that would actually benefit from a higher US dollar, such as exporters with US dollar-denominated revenues (not only do such companies’ revenues act as a natural hedge against their US-dollar liabilities, but a rising dollar would also boost their margins and, hence, cash flows and creditworthiness) 
  • Neutral—companies for which a rising dollar would have neither good nor bad consequences, such as those in Hong Kong or the United Arab Emirates where the local currency is pegged to the US dollar, or industries such as utilities where tariff structures enable companies to pass higher currency costs through to consumers
  • Low-risk—companies which have a manageable exposure to US-dollar liabilities (either because the amount of US-dollar debt is a manageable proportion of their overall liabilities, or because it has been hedged to the extent that it is manageable)
  • High-risk—companies with a high US-dollar debt exposure and little or no offset, either through hedging or US-dollar revenues.

The criteria we used for classifying the companies were conservative. We included issuers in both the low- and high-risk categories, for example, based purely on their US-dollar liability exposures, ignoring risk-mitigating factors such as implied government support or strong asset coverage of debt.

Most Issuers Unhurt by Stronger Dollar

As the display shows, the issuers fell overwhelmingly into the net positive and neutral categories—a combined 104 out of 131 in terms of the number of issuers, and a combined 79% in terms of the market value of outstanding debt. The balance between net positive and neutral was broadly equal.


Let’s be clear that this is not intended to be a representation of the whole universe of US-dollar EM corporate debt: we applied this analysis to a hypothetical portfolio only, and not to any of the EM corporate debt benchmarks. We’ve made some significant assumptions, too, such as a moderate fall in EM currencies of 5%–15% a year: these results would not hold for countries—such as Ukraine, for example—where a deep and rapid devaluation was possible.

Active Portfolio Can Contain Currency Risk

Nevertheless, we think this example of an active investment exposure to EM corporate debt should provide food for thought for those who see US currency risk in the sector in purely systemic terms. Clearly, it’s possible to build a portfolio where such risk is reasonably well contained.

It’s possible for two reasons. First, EM companies that borrow in US dollars tend to be self-selecting, in the sense that they have a natural affinity for the currency—US-dollar export revenues, for example—and, therefore, a better-than-average ability to manage the currency exposure. Second, an active investment manager (particularly one with a strong research focus) would pay, as a matter of course, close attention to a company’s ability to meet its foreign exchange liabilities.

None of this is intended to downplay the reality of US currency risk in the EM corporate debt sector; rather, it’s intended to arrive at a better understanding of its true nature. In our view, this is much more a matter of individual borrower risk than systemic risk.


Shamaila Khan is a Portfolio Manager for Emerging-Market Corporate Bonds at AllianceBernstein.




  1. David Somerville

    Greetings, Shamaila,

    Your column, which I first read in FT, has an unusual – almost contrarian – view on EM USD denominated debt. Generals usually fight the last war and I wonder to what extent analysts etc. are re-living 97-98. One question I have about your column is: what do you mean by a “representative hypothetical portfolio”?

    Best regards,


    • Shamaila Khan

      Hello David and thanks for your interest in our blog. Regarding your question – this is representative of an allocation based on active management principles and bottom-up security selection, derived from our research conclusions.

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