## The Turning Tide: How Vulnerable are Asian Corporates?

_IMF Working Papers, May 6, 2019_

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## Bibliographic details
- Authors: Bo Jiang, Tahsin Saadi Sedik
- Published: May 6, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498311502.001

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### Summary and key findings
- Using a new firm-level dataset with comprehensive information on Asian firms’ FX liabilities, the paper shows Asia’s nonfinancial corporate sector is vulnerable to a tightening of global financial conditions.
- Higher global interest rates and exchange rate depreciation increase the probability of default of Asian firms.
- A 30 percent currency depreciation is associated with a two-notch downgrade in the corporate credit rating (e.g., from A to BBB+), resulting in 7 percent of Asian firms falling into bankruptcy.
- The impact of depreciation is nonlinear:
  - As firms’ FX liability increases, the balance sheet channel of exchange rate effects offsets, then dominates, the competitiveness channel.
  - The balance sheet channel offsets the competitiveness channel when the share of U.S. dollar debt is between 10 and 20 percent.
- Investment responses to depreciation are heterogeneous:
  - Currency depreciation increases firm-level investment on average.
  - For firms with the share of FX liabilities above 20 percent, investment contracts with depreciation.

### Analysis and mechanisms
- Channels identified:
  - Balance sheet channel: depreciation increases local-currency value of FX liabilities, weakening balance sheets when FX liabilities are sizable.
  - Competitiveness channel: depreciation can improve exporters’ competitiveness and revenues, supporting firm performance.
- Nonlinearity: the relative strength of the balance sheet and competitiveness channels depends on the share of FX liabilities; once U.S. dollar debt share is between 10 and 20 percent, the balance sheet channel begins to offset competitiveness gains and ultimately dominates as FX exposure rises.

### Policy-relevant implications
- Monitor firm-level FX liabilities: vulnerability rises with higher shares of U.S. dollar debt and overall FX liabilities.
- Consider corporate sector exposure when assessing macrofinancial risks from global interest rate increases and exchange rate movements.
- Tailor firm- and sector-level policy responses recognizing heterogeneous investment responses:
  - Support may be needed for firms with FX liabilities above 20 percent, where depreciation contracts investment and raises default risk.
  - Policies that mitigate balance sheet currency mismatches (e.g., hedging facilitation, liability management) could reduce sensitivity to depreciation.

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_Source: https://www.imf.org/en/publications/wp/issues/2019/05/06/the-turning-tide-how-vulnerable-are-asian-corporates-46733_