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

_IMF News, September 29, 2015_

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## Bibliographic details
- Published: September 29, 2015

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### Key findings on corporate debt trends
- 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.

### Drivers and vulnerabilities
- 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.

### Policy recommendations and preparedness
- 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.

### Timeline and follow-up
- 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.*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Policy](https://www.imf.org/en/news/search)
- [IMF Country Focus](https://www.imf.org/en/news/country-focus)
- [Finance & Development: Spill Over](http://www.imf.org/external/pubs/ft/fandd/2015/09/chen.htm)
- [Blog: U.S. interest rates & emerging markets](http://blog-imfdirect.imf.org/2014/05/22/taper-tantrum-or-tedium-how-u-s-interest-rates-affect-financial-markets-in-emerging-economies/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol092915b_