ADB Sounds Alarm on U.S. Yield Jump as Asia Debt Rises

(Bloomberg) -- The Asian Development Bank warned that rising U.S. yields could trigger currency and debt crises across Asia like past shocks that rocked emerging markets.

Developing Asia has loaded up on dollar-denominated debt to pay for the fight against Covid-19. That’s raised the risk of capital flight and loan defaults should further gains in U.S. yields cause local currencies to plunge, according to ADB President Masatsugu Asakawa.

“Past experience shows that whenever U.S. yields go up, capital markets in emerging and developing markets take a major hit,” the 63-year-old former top Japanese currency official said in an interview this week. “We are very concerned about the potential risks surrounding the debt pile-up.”

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Asakawa, who took the top job at the Manila-based lender after serving as vice minister at Japan’s finance ministry, isn’t alone. Even before this month’s jump in U.S. yields, world debt approaching record levels had already raised the alarm at the International Monetary Fund.

Indonesia’s rupiah and the Thai baht have slid more than 2% against the dollar in the past month, but most investors see stronger foreign currency reserves this time around insulating Asia from the kind of damage that occurred during earlier crises.

Still, Asakawa said that lending countries are doing the right thing in stepping up debt relief, under a framework set up last March by G-20 nations. At the same time, both borrowing and lending countries should work to increase transparency, beef up protection for banking systems, and create regional financial safety nets, he said.

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Raising tax revenue is also key, Asakawa said, because it would help buffer domestic capital markets and reduce reliance on borrowing. He cited figures showing that ADB member nations were taking in about 25% less tax revenue than the more developed countries of the Organization for Economic Cooperation and Development on average compared to the sizes of their economies, which suggests room for improvement.

“Efforts to make sure corporate taxes are appropriately paid are very important,” he said.

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