Stress Testing Corporate Balance Sheets in Emerging Economies

IMF Working Papers, September 30, 2015

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Stress Testing Corporate Balance Sheets in Emerging Economies

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Bibliographic details

• Authors: Julian T Chow
• Published: September 30, 2015
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781513502717.001

Summary

• Author: Julian T Chow
• Date: September 30, 2015
• Paper series: IMF Working Papers, Working Paper No. 2015/216
• Core summary:
  • In recent years, firms in emerging market countries have increased borrowing, particularly in foreign currency, owing to easy access to global capital markets, prolonged low interest rates and good investment opportunities.
  • The paper discusses trends in emerging market corporate debt and leverage, and illustrates vulnerability of firms to interest rate, exchange rate and earnings shocks.
  • Results of a stress test show that while corporate sector risk remains moderate in most emerging economies, a combination of macroeconomic and financial shocks could significantly erode firms’ ability to service debt and lead to higher debt at risk, especially in countries with high shares of foreign currency debt and low natural hedges.

Key findings and analysis

• Trends in corporate debt and leverage:
  • Firms in emerging market countries have increased borrowing, with a pronounced rise in foreign currency borrowing.
  • Drivers cited: easy access to global capital markets, prolonged low interest rates, and favorable investment opportunities.
• Vulnerabilities identified:
  • Exposure to interest rate shocks.
  • Exposure to exchange rate shocks.
  • Exposure to earnings shocks.
• Stress test outcomes:
  • Corporate sector risk is assessed as moderate in most emerging economies under baseline conditions.
  • A combination of macroeconomic and financial shocks could:
  • Significantly erode firms’ ability to service debt.
  • Lead to higher debt at risk.
  • Have especially pronounced effects in countries with high shares of foreign currency debt and low natural hedges.

Subject classification and keywords

• Subject: Corporate sector, Currencies, Economic sectors, Emerging and frontier financial markets, Financial markets, Financial sector policy and analysis, Financial statements, Money, Public financial management (PFM), Stress testing
• Keywords: balance sheet, balance sheet information, banking sector, corporate, Corporate sector, Currencies, debt at risk, debt index, debt issuance, Emerging and frontier financial markets, emerging market, emerging market corporate, Emerging market corporate debt, expenses of the corporate, Financial statements, foreign currency issuance, Global, interest expense, leverage, liabilities structure, on-balance sheet derivatives obligation, Stress testing, WP

Content in this bundle

• Appendix 1. Emerging Markets Corporate Debt Data
  • Appendix 1. Emerging Markets Corporate Debt Data (Markdown version)
  • Appendix 1. Emerging Markets Corporate Debt Data (PDF)