The Turning Tide: How Vulnerable are Asian Corporates?

May 6, 2019

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Format: Chicago

Bo Jiang, and Tahsin Saadi Sedik. The Turning Tide: How Vulnerable are Asian Corporates?, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Using a new firm-level dataset with comprehensive information on Asian firms’ FX liabilities, we show that 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. But the impact is nonlinear—as the firms’ FX liability increases, the balance sheet channel of exchange rate 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. We also find that currency depreciation increases firm-level investment on average, but for firms with the share of FX liabilities above 20 percent, investment contracts with depreciation.

Subject: Currencies, Depreciation, Exchange rates, Financial statements, Foreign exchange, Money, National accounts, Public financial management (PFM)

Keywords: Asia and Pacific, Asian Emerging Markets, Balance sheet condition, Balance sheet information, Corporate Debt, Corporate Distress, Credit constraint, Currencies, Depreciation, Dollar, Exchange Rate Depreciation, Exchange rates, Exporter, Financial statements, Firm, Firm level, Foreign currency, FX liability, Global, Global Finacnial Conditions, WP

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/093
Stock No:

WPIEA2019093
ISBN:

9781498311502
ISSN:

1018-5941

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