IMF Survey : Rise in Emerging Market Corporate Debt Driven by Global Factors

IMF News, September 29, 2015

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The corporate debt of nonfinancial firms across major emerging markets rose from about $4 trillion in 2004 to well over $18 trillion in 2014.
The emerging market corporate debt-to-GDP ratio had grown by 26 percentage points between 2004 and 2014.
The share of bonds in corporate debt nearly doubled over the last decade, reaching 17 percent in 2014.
Debt increases were particularly pronounced in construction, and oil and gas sectors.
Estimates of corporate leverage rose markedly in China and in Turkey; corporate indebtedness also rose appreciably in Chile, Brazil, Peru, Mexico, and Colombia.

Global factors identified as relatively more important determinants of the rise in corporate debt in the post-crisis period include:
- Low interest rates in advanced economies such as the United States, Europe, and Japan.
- Investors in advanced economies’ search for higher returns.
- Commodity prices.
Low interest rates enabled emerging market firms to issue bonds at lower yields and longer maturities despite weaker balance sheets.
The increase in firms’ debt-to-asset ratio has often included a higher share of foreign-currency liabilities, raising exposure to exchange-rate movements.
Quoted risk assessment: “These developments make emerging market economies more vulnerable to a rise in interest rates, dollar appreciation, and an increase in global risk aversion,” said Gaston Gelos, Chief of the Global Financial Stability Analysis Division at the IMF.
Specific vulnerabilities listed:
- Firms that have borrowed the most will face the sharpest rise in debt-service costs when interest rates rise in advanced economies.
- Local currency depreciations associated with rising policy rates in advanced economies would make it increasingly difficult for firms to service foreign currency-denominated debts if not adequately hedged.
- Lower commodity prices reduce the natural hedge for firms in commodity-related businesses.

Strengthen monitoring and data:
- Policymakers should monitor vulnerable and systemically important firms, as well as banks and other sectors closely linked to them.
- Improve collection of data on corporate sector finances, including foreign-currency exposures.
Use of macroprudential policies to contain risk buildup:
- Tools include higher capital requirements for foreign exchange exposures, and caps on the share of such exposures on banks’ balance sheets.
Use of microprudential measures to protect individual institutions:
- Conduct bank stress tests related to foreign currency risks, including derivatives positions.
In the event of disruptive capital outflows, use a combination of monetary, fiscal, and financial sector policies depending on country circumstances to safeguard stability.
Prepare for corporate distress:
- Emerging markets should be prepared for corporate distress and sporadic failures in the wake of rising interest rates in advanced economies, and where needed, should reform insolvency regimes.

The IMF will release further research from the Global Financial Stability Report on October 7.
Publication date of this Survey: September 29, 2015.

Source: IMF Survey : Rise in Emerging Market Corporate Debt Driven by Global Factors (IMF News), September 29, 2015.