Original Sin Dissipation and Currency Exposures in Emerging Markets

In this paper, I construct a dataset, which measures the external liability composition of emerging market economies in different instruments and currencies. Thus, the dataset shows, with reasonable precision, the original sin dissipation in emerging markets since the early-2000s and accordingly the currency exposures of entities in emerging markets. The new data imply that emerging markets have much lower currency exposures compared to historical trends, as their positions in foreign currency have improved at both the aggregate and the sectoral levels. The sources of external financing in emerging markets have shifted from foreign currency debt to FDI, portfolio equity investments, and local currency debt, while the countries have accumulated foreign currency assets. Also, only non-financial corporate sectors in emerging markets have significant net foreign currency debt at the sectoral level. On the other hand, another important empirical regularity is the high correlation between external liabilities of equities and local currency debts and the depth of capital markets stock and bond markets. This suggests that the original sin dissipation is related to capital market development in emerging market economies