• July 6th, 2020
• By Midsilver Investment Limited

International lending can be unpredictable, often halting abruptly during global economic downturns. Non-financial corporate entities that depend on foreign credit are at risk when capital flows reverse. Likewise, businesses borrowing in foreign currencies may encounter difficulties in renewing their loans when the domestic currency drops or when global dollar financing conditions become strict. This analysis utilizes multiple BIS datasets to study the external and foreign currency debt of corporates in significant emerging market economies just before the onset of the Covid-19 pandemic.

Post the 2007-09 Great Financial Crisis (GFC), many corporate borrowers in emerging market economies (EMEs) have shifted more towards foreign funding sources, a significant portion of which is in foreign currencies. Such debts can be vulnerable to abrupt stops, often resulting in severe economic downturns.

This analysis leverages various BIS datasets to explore two facets of EME corporate debt as of end-2019, right before the Covid-19 pandemic hit. Firstly, we gauge the externally sourced debt, which includes cross-border credit in the form of bonds owned by foreign entities and loans received from overseas banks in any currency. Next, using BIS's strength in currency data, we evaluate the foreign currency liabilities that corporates owe to all lenders, both local and international. These two aspects do intersect but also have distinctions that can significantly impact borrowers' risk of sudden stops.

Our attention is primarily on non-financial corporates (NFCs) in EMEs due to their prominence in borrowing from foreign sources and in foreign currencies. Specifically, they were responsible for a large portion of the increase in total dollar credit extended to all non-bank EME borrowers post-GFC, which escalated from $1.6 trillion in 2009 to $3.8 trillion by the end of 2019. The economic lockdown in 2020, combined with supply chain interruptions, decreased sales, and plunging commodity prices, put several businesses under pressure, raising concerns about their debt repayment capacities.