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Abu Dhabi, UAEWednesday 19 September 2018

Where have the trillions central banks injected actually gone?

Not all of the liquidity has actually gone into circulation

The US Federal Reserve Board chairwoman Janet Yellen. The Fed and other central banks have injected some $34 trillion into their economies. oshua Roberts/Reuters
The US Federal Reserve Board chairwoman Janet Yellen. The Fed and other central banks have injected some $34 trillion into their economies. oshua Roberts/Reuters

Led by the US Federal Reserve, the world's biggest central banks have injected an estimated US$34 trillion or so into the global economy by way of monetary stimulus over the past eight years, which is equal to around 5 per cent of global GDP annually.

Where has all this money gone to?

It is more accurate to talk of the huge "quantitative easing" (QE) exercise by the Fed and others as an increase in the lending power of commercial banks than a cash injection into the economy. So-called "helicopter money", or direct cash handouts by governments, have been avoided.

Not all of the liquidity has actually gone into circulation. Banks in Japan, for example, have mainly hoarded their QE funds at the Bank of Japan. But very large (if not easily quantifiable) sums of money have been lent out, forcing up sharply the price of stocks, shares and real estate.

The tsunami of lending has also resulted in a record build up of global debt, not least in the US corporate sector where, says the Institute of International Finance (IIF), it has soared back to levels seen at the time of the global financial crisis, despite pledges then to "deleverage" borrowing.

Anticipating trouble ahead as monetary condtions begin to tighten, US borrowers - financial institutions such as banks and others - have begun to deleverage somewhat, while there has also been a "steady decline in private sector debt in the euro zone," according to the IIF.

Others warn that building up huge national debt piles is a risky strategy with the Brookings Institution saying in a report last year that "when considering these risks, the traditional answer seems the most apt: the less indebted the fiscal authority, the more room for manoeuvre".

"Having the ability to engage in countercyclical fiscal and monetary policy requires both a low level of sovereign debt and central bank credibility," it adds.

It is emerging market economies that are the big borrowers now and there is "little sign of a slowdown in [these] markets,where debt has risen by $3tn over the past year to over $56tn", says the IIF. It continued into this year with a worrying proportion of it in dollars or other foreign currencies.

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Concern centres on China, where, it says, "over the past four quarters, the rise in the US dollar value of total debt has been sharpest,rising by some $2tn to over $32.7tn". But aspects of the debt build-up are posing worries in other parts of Asia as well.

In the Middle East, Saudi Arabia is one of two countries to figure among the top 25 major borrowers listed by the IIF. In the kingdom, the corporate sector debt has reached just under 50 per cent of GDP, although in other sectors such as household and government borrowing the country ranks quite low down compared with others.

Overall, "emerging market debt reached 218 per cent of GDP in the first quarter of 2017, five percentage points higher than a year ago", the institute has noted. There is "little sign of a slowdown in emerging markets, where debt has risen by $3tn over the past year to over $56tn".

At the same time, "emerging market foreign exchange-denominated bond issuance is running at its fastest pace since 2014", with more than 70 per cent of this being in dollar form. Ominously, the IIF said, "rollover [or debt renewal] risk is high" with more than $1.9tn of emerging market bonds and syndicated loans due for redemption between now and the end of 2018.

"In some cases, this sharp debt build-up has already started to become a drag on sovereign credit profiles, including in countries such as China and Canada," the report noted.

"Despite some slowdown in overall debt accumulation (particularly in the non-financial corporate sector as the government tightens monetary policy), Chinese households have accelerated their borrowing. The household debt-to-GDP ratio in China hit an all-time high of over 45 per cent in the first quarter of 2017, well above the emerging market average of around 35 per cent. Our estimates based on monthly data on total social financing suggest that China's total debt surpassed 304 per cent of GDP as at May 2017," the IIF said.

Meanwhile, total debt in emerging markets excluding China has increased by almost $1tn to over $23.6tn in the first quarter, driven mainly by Brazil and India. And, "the pace of emerging-market credit downgrades is accelerating once again", according to the institute.

The high level of foreign-currency borrowing among some Asian emerging economies has echoes of the situation at the time of the 1997 Asian financial crisis, analysts say. So-called "currency mismatches" between foreign debt liabilities and local currency revenue was a key factor then.

With dollar interest rates on the rise and credit conditions tightening generally, there are fears that some emerging market borrowers - in the corporate sector especially - could be faced with debt-servicing or rollover difficulties.

It is possible to identify new sources of risk to financial stability, especially in situations in which corporates acting as financial speculators and/or domestic banks fail to fully understand the underlying domestic and international exposures of the corporate sector, points out the Brookings Institution.

"Accordingly, it is timely for governments and financial regulators to review risk surveillance and macroprudential policies in order to ensure that these risks are suitably contained."

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