LONDON, Feb 5 (Reuters) - The years-long boom in dollar borrowing by emerging market firms may be coming to an end, the head of the Bank for International Settlements (BIS) said on Friday, warning that could trigger more currency market volatility.
Jaime Caruana, the General Manager of the Swiss-based forum for major central banks, said the latest data, which is from the end of September, showed there had been no increase in dollar-denominated debt of EM companies for the first time since 2009.
"The feedback loop between deleveraging and emerging market economy (EME) currency depreciation presents challenges that should not be underestimated," Caruana said in a speech at the London School of Economics.
"That feedback loop has started to impact the broader economy in EMEs."
A strong dollar can be problematic for emerging markets because it makes it more expensive in local currency terms to pay back any debt that is in dollars.
The BIS estimates that EM firms have $3.3 trillion of debt in dollars outstanding, roughly one-third of it in bonds. The dollar jumped roughly 30 percent against many EM currencies last year.
Caruana said these shifts, along with maturing financial cycles in a number of emerging economies, were helping to drive the current combination of disappointing economic growth, sharp falls in commodity prices and exchange rate volatility.
He said these should not be seen as one-off shocks or headwinds, but instead as reflecting a number of phenomena that have accumulated over time, including countries' policy choices.
"These transitions and realignments inevitably bring short-term discomfort in the financial markets. They also raise significant risks," Caruana said.
"But depending on the policy responses, they could eventually allow renewed and, above all, more sustainable and resilient growth, both in advanced economies and in key emerging economies."
The Q3 data Caruana was referring to covers the period just before another surge in the dollar that lasted until December. There is a possibility that outstanding debt may have fallen since then given a dearth of EM debt issuance so far this year.
But a shaky start to 2016 for financial markets has brought the dollar to a shuddering halt. Traders are now betting on one U.S. rate rise this year at most and this week the dollar has fallen 2.5 percent, its biggest drop since 2011.
Caruana said the plunge in oil and commodity prices were another potentially ominous sign for emerging market countries and companies that rely on those sectors.
Oil and gas companies' total bonds outstanding increased from $455 billion in 2006 to $1.4 trillion in 2014, an annual growth rate of 15 percent.
A substantial portion of that increased borrowing was by state-owned oil companies from EMEs.
Over that period, the stock of total borrowing (syndicated loans and debt securities) of Russian companies grew at an annual rate of 13 percent, at 25 percent in Brazil and 31 percent in China. (Reporting by Marc Jones; Editing by Catherine Evans)