New spare tires: local currency credit as a global shock absorber

Stefan Avdjiev, John Burger and Bryan Hardy

No 1199, BIS Working Papers from Bank for International Settlements

Abstract: It is well-known that dollar credit to emerging market (EM) corporates has expanded dramatically in the past two decades. However, the concurrent expansion of local currency credit, facilitated by more developed domestic financial systems, has been less recognized. This paper first uses data on EM corporates' borrowing through bonds and syndicated loans to show the considerable rise of their local currency debt. It then utilizes comprehensive firm-level data to document that EM corporates' local currency borrowing can offset shocks to their dollar debt, and how this varies across firms and countries. A broad dollar appreciation is associated with a decline in credit to ''local'' firms (smaller, non-exporting, with low profitability) but has no significant impact on ''global'' firms (larger, exporting, highly profitable). Firms in the mid-range (of these dimensions) see lower dollar debt in response to a stronger dollar, but replace it with local currency debt, thus offsetting the shock.

Keywords: emerging markets; local currency debt; foreign currency debt; global factors; dollar debt (search for similar items in EconPapers)
JEL-codes: F30 G30 (search for similar items in EconPapers)
Date: 2024-07
New Economics Papers: this item is included in nep-fdg and nep-ifn
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Working Paper: New spare tires: local currency credit as a global shock absorber (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1199

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