Dollar Credit to Emerging Markets Shrinks Amid Rising Renminbi Influence
As global economic conditions evolve, dollar-denominated lending to emerging markets is drying up, with a striking $78 billion drop in Q2 2024 alone. This shift, revealed in the latest report from the Bank for International Settlements (BIS), suggests new challenges and opportunities for corporate treasurers managing financing in emerging markets.
With rising renminbi-denominated credit, especially in the Asia-Pacific region, the international credit landscape is undergoing a fundamental transformation that could reshape currency exposure strategies for years to come.
The BIS report shows that dollar-denominated credit to emerging markets and developing economies (EMDEs) contracted by $78 billion in the second quarter of 2024, a notable drop amid the Federal Reserve’s recent rate cuts. Although the Fed had raised rates aggressively from 2022 through mid-2024, a series of cuts, starting in September 2024, aimed to ease conditions as inflation showed signs of stabilising. However, the recent cuts have not yet countered the impact of the previous tightening cycle, leaving dollar financing in EMDEs both costly and scarce.
For emerging markets, which have long relied on dollar-denominated credit, this contraction has profound implications. EMDEs that traditionally depend on dollar funding are now facing limited access, pushing them to explore alternative sources. For corporate treasurers, this shift may necessitate a re-evaluation of their dollar dependency, as continued constraints in dollar liquidity could disrupt financing plans and affect profitability.
As access to dollar credit becomes increasingly restrictive, some markets are turning to alternative currencies. In the Asia-Pacific region, renminbi-denominated lending has grown, with the BIS report indicating a steady 3% YoY increase in credit to EMDEs. China’s expanding economic influence in Asia, coupled with currency alignment among regional economies, is making the renminbi an increasingly viable choice for borrowing.
This trend marks a subtle but impactful shift toward “de-dollarization,” a move many experts view as part of a long-term strategy for diversifying currency risk. Borrowers in Asia-Pacific, particularly in countries with strong trade and financial links to China, are finding renminbi credit offers a lower-cost alternative that aligns with regional economic dependencies.
While beneficial, the growing reliance on renminbi introduces new complexities for treasurers who may need to revisit their risk management frameworks. Renminbi-based credit, while reducing exposure to dollar fluctuations, may add volatility in exchange rates and create challenges in hedging strategies. Companies will need to assess the trade-offs between lower financing costs and the potential increase in currency risk.
The BIS report also provides a detailed look into credit distribution across sectors and regions, revealing that non-bank financial institutions (NBFIs) are receiving an increasing share of cross-border credit, particularly in high-profile regions like the Cayman Islands, Luxembourg, and the U.S. By contrast, non-financial corporate borrowers—traditionally significant users of cross-border credit—have seen a decline in available funding, especially in the U.S.
This shift suggests a change in the structure of international credit flows, potentially affecting how treasurers approach credit sourcing. NBFIs often provide financing through complex structures that might not align with the needs of traditional corporate borrowers. As a result, companies may encounter challenges in obtaining credit from these institutions, forcing them to turn to bond markets or other financing routes.
The shift to NBFIs also highlights the growing importance of non-traditional lenders in the financial ecosystem. For treasurers, understanding the nuances of NBFI financing—such as shorter maturities, higher costs, or conditional lending practices—will be critical in adapting financing strategies to maintain liquidity and flexibility in uncertain times.
Another notable trend in the BIS data is the increasing reliance on bond financing over traditional bank loans, particularly in dollar-denominated debt for EMDEs. With bank lending slowing, bond issuance has become a vital alternative, meeting demand that conventional banking cannot accommodate due to costs and regulations. This trend is particularly pronounced in EMDEs, where bond markets now play a more central role in financing.
While bond financing offers advantages, such as potentially more favourable terms, it also comes with its own set of challenges. Bond markets can be volatile, with fluctuating rates influenced by broader economic and political factors. For corporate treasurers in emerging markets, the rise in bond financing could necessitate additional strategies for managing cost volatility and ensuring that financing terms align with their cash flow requirements.
The preference for bond financing over bank lending suggests a need for treasurers to cultivate new relationships with institutional investors and expand their knowledge of bond issuance. For example, a treasurer might have to work closely with investment banks to time bond issuances strategically or manage refinancing risks in markets susceptible to global economic shifts.
In light of these shifts, treasurers face the need to reassess both their currency exposure and financing diversification. Given the constraints in dollar credit and the growing availability of alternative currencies, treasurers may need to pursue a multi-currency approach, balancing dollar and renminbi exposure based on cost, availability, and strategic fit.
To stay agile in this dynamic environment, treasurers should prioritize the following: