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

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

Mar 22, 2023 450 likes •727 views

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

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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

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Borrowers Investors A L A L

Country A

A’s currency

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Finding 1: lenders tend to lend in their own currency

Borrowers A L Investors A L A L A’s currency

Country A

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

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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

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Canadian corporate bond issuance

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

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Finding 3: exception is the US and the US dollar

Borrowers A L Investors A L A L US dollar

USA

A L

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US corporate bonds issuance

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

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Liabilities side of lender’s balance sheet looms into view

Borrowers A L Investors A L A L A’s currency

Country A

A L

Pension funds and life insurers have bond-like

  • bligations; they want

assets that back them up

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Lessons from 1990s EME financial crises

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l Avoid currency mismatch l Avoid maturity mismatch

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Overcoming original sin: non-resident holdings of EME local currency sovereign bonds

Source: World Bank

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%

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Two duration measures

Duration = −

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l Compare duration measures with:

§ Percentage return in local currency terms § Percentage return in dollar terms

dP / P dr

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Percentage return Yield change

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EMEs local currency sovereign bond returns1, January 2013 – October 2018

1Total 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.

Mexico South Africa

y = -0.06 -12.4x where R2 =0.58 y = -0.01 -5.05x where R2 =0.88 –10 –5 5 1.0 –0.5 0.0 0.5 Change in yield, in percentage points Local currency return Return, in percent y = -0.02 -12.8x where R2 =0.70 y = 0.03 -4.59x where R2 =0.94 –10 –5 5 1.0 –0.5 0.0 0.5 Change in yield, in percentage points US dollar return

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Return, in percent

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EMEs local currency sovereign bond returns1, January 2013 – October 2018

1Total 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.

Indonesia Brazil

y = -0.09 -6.6x where R2 =0.60 y = -0.01 -4.52x where R2 =0.88 –10 –5 5 1.0 –0.5 0.0 0.5 Change in yield, in percentage points US dollar return Return, in percent y = -0.11 -8.52x where R2 =0.66 y = 0.04 -4.34x where R2 =0.93 –10 –5 5 1.0 –0.5 0.0 0.5 Change in yield, in percentage points US dollar return

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Return, in percent

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Advanced economies sovereign bond returns1, January 2013 – October 2018

1 GBI Global Country 5 to 7 year maturity indices forthe selected economies.

Sources: JPMorgan Chase; BIS calculations. y = -0.06 -2.67x where R2 =0.02 –4 –2 2 0.3 –0.2 –0.1 0.0 0.1 0.2 Change in yield, in percentage points Local currency return Return, in percent y = -0.12 -1.91x where R2 =0.01

France Sweden

y = -0.03 -5.41x y = -0.03 -5.09x where R2 = 0.96 where R2 =0.94 –6 –4 –2 2 0.3 –0.2 –0.1 0.0 0.1 0.2 Change in yield, in percentage points US dollar return

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Return, in percent

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Covid-19 shock

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Foreign ownership in EME local currency bond markets

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

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

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Exchange rates co-move with bond yields in EMEs

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EME FX reserve buffers

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

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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

Q & A SESSION

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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