Corporate Borrowing in Emerging Markets: Fairly Long Term, but Only for a Few
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Research & Policy Briefs From the World Bank Chile Center and Malaysia Hub No. 18, October 2018 Corporate Borrowing in Emerging Markets: Fairly Long Term, but Only for a Few Juan J. Cortina, Tatiana Didier, and Sergio L. Schmukler It is generally believed that firms in emerging markets rely on shorter-term instruments than firms in advanced economies. In recent Public Disclosure Authorized years, firms in emerging market economies have substantially increased the amount of debt raised in global bond and syndicated loan markets, triggering concerns about their exposure to rollover risks. However, new evidence examined in this policy brief shows that emerging market firms have been using these markets to borrow long term, possibly diminishing the risks associated with higher debt levels and foreign currency financing. Challenging the conventional wisdom, large firms from emerging markets have issued bonds and syndicated loans at maturities similar to those issued by firms from advanced economies. These findings have implications for understanding the sources of short-termism in emerging markets, the actual risks emerging economies face from rising levels of corporate borrowing, and the policy measures that might help firms that cannot borrow long term. Debt issuance by firms in emerging markets has expanded at a 2017). Moreover, increasing foreign currency exposure can very fast pace since the early 1990s. The total amount of debt exacerbate debt burdens (measured in domestic currency) in the issued through domestic and cross-border bonds and syndicated event of sudden exchange rate depreciations, if such debt is not loans increased nearly 30-fold in emerging markets between properly hedged (Acharya et al. 2015; McCauley, McGuire, and 1991 and 2014 (figure 1). This growth has been faster than that Sushko 2015; Caballero, Panizza, and Powell 2016; The Economist in equity markets and traditional bank financing. 2015, 2016; Alfaro et al. 2017). Fluctuations in the value of the foreign currency debt, mostly denominated in U.S. dollars, can Although the increase in the level of corporate debt financing also influence the credit cycle in the borrowing country through can be associated with important benefits to firms from other mechanisms. For example, U.S. dollar depreciations can Public Disclosure Authorized emerging market economies, such as the financing of growth reduce the net worth of domestic firms with currency opportunities, this trend has also raised several concerns. Recent mismatches in their balance sheets, tightening their financial studies have discussed the perils associated with the recent debt conditions (Bruno and Shin 2015). These concerns are expansion in emerging markets, especially after the global compounded by the perception that a large proportion of the financial crisis. Most of the attention has been centered on the current foreign currency borrowing by emerging market rising levels of corporate leverage and the foreign currency countries has been used to accumulate cash and short-term exposure of the newly issued debt because both can lead to instruments in domestic currency (Bruno and Shin 2017). corporate and systemic vulnerabilities. In addition, interest rate risks can aggravate currency risks. The rapid growth in debt borrowing has raised policy The recent growth in emerging market corporate debt has concerns because financial crises in emerging markets are occurred amid unprecedentedly loose global financial usually preceded by high levels of corporate leverage (Mendoza conditions, with historically low levels of interest rates. As global and Terrones 2008; Schularick and Taylor 2012; Herwadkar financial conditions tighten, the debt-servicing burden of Figure 1. Firm financing, selected emerging market economies, 1991-2014 Public Disclosure Authorized 1,200 Firms in emerging markets are issuing increasing amounts of corporate debt. 4% 1,000 3% 800 GDP 600 2% f $US billion 400 o ercent P 1% 200 0 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Public Disclosure Authorized Equity Corporate bonds Syndicated loans Equity, % of GDP Total debt, % of GDP Source: Authors calculations based on data from Thomson Reuters SCD Platinum. Note: U.S. dollar amounts are in 2011 dollars. This figure shows the total amount raised per year in equity, corporate bond, and syndicated loan markets by nonfinancial corporations from 37 emerging market economies. Total debt is the sum of the amount raised through corporate bonds and syndicated loans, both domestic and cross-border. Affiliation: Cortina: Development Research Group, the World Bank. Didier: Development Economics Strategy and Operations, the World Bank. Schmukler: Development Research Group, the World Bank. E-mail addresses: [email protected], [email protected], [email protected]. Acknowledgement: We received very useful comments from José De Luna Martínez, Norman Loayza, and Luis Serven, as well as helpful edits from Nancy Morrison. The analysis presented in this Research & Policy Brief is based on the 2018 paper, “Corporate Debt Maturity in Developing Countries: Sources of Long- and Short-Termism,” by J. J. Cortina, T. Didier, and S. Schmukler, The Word Economy, also available ashttp://documents.worldbank.org/curated/en/795161508437504068/Corporate-debt-maturity-in-developing-countries-sources-of-long-and-short-termism World Bank Policy Research Working Paper 8222. Objective and disclaimer: Research & Policy Briefs attempt to synthesize existing research and data to shed light on a useful and interesting question for policy debate. Research & Policy Briefs carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent. Corporate Borrowing in Emerging Markets: Fairly Long Term, But Only for a Few Figure 2. Debt maturity by country, 1991−2014 averages Contrary to the general perception, the average maturity of debt issued by firms in emerging markets is not shorter than that of firms in advanced markets. 16 PNG 14 JOR MAR QAT 12 CRI OMN VNM VEN CHL ECU URY PAN BHR 10 SAU BGR TUR IND HUN PRT EGY COL KAZ 8 IDNTUN PER MMEYXS GRC AUT PHL SLV LVLTAU ISR ARE BGD JAMCHN IRN LBN IRL NOR THA AZE POL SVK CZE ITA CAN SWE LUX NGA ROU BRA TWN ECYSPP GBR NLDUSA 6 BOL LKA ZAF ISLFRA FIN DNK Maturity (years) RUS KWT BEL AUS ARG KOR HKG DEU SGP JPN CHE NZL 4 GHA UKR PAK 2 0 6 7 8 9 10 11 12 Log of per capita GDP Source: Cortina, Didier, and Schmukler (2018). Note: The plot measures debt maturity at issuance. corporate debt contracted at variable rates will increase, as well. possibilities of lengthening debt maturity when firms are This burden could be intensified by local currency depreciations, exposed to rollover crises (G20 2013; Giovannini et al. 2015; which are typically associated with rising global interest rates World Bank 2015; Beck 2016). (IMF 2015). Despite the numerous discussions, evidence on the actual Less attention has been devoted to the rollover risks maturity of firms’ liabilities and where long- and short-term debt associated with the maturity structure of the newly acquired originates is still scant. Most of the empirical literature is based debt. The general perception, rooted in earlier academic on the so-called “short-term” and “long-term debt” (less than research, is that debt raised by emerging market firms is short and more than one year) gathered from firm-level balance sheet term. Long-term debt has the obvious advantage of allowing information. These studies find that the ratio of long-term debt issuing firms to finance large investments that take time to (with maturities greater than one year) to total liabilities is mature and to reduce the rollover risks associated with tighter typically lower in emerging markets than in advanced economies credit markets (Brunnermeier 2009; Jeanne 2009; Raddatz 2010; (see, for example, Demirgüç-Kunt and Maksimovic 1999; Fan, Titman, and Twite 2012). Beltratti and Stulz 2012). By contrast, when firms rely on short-term debt, they can experience tighter financial constraints New evidence on debt maturity during credit crunches, leading to significant effects in the real economy (Almeida et al. 2011). Although the maturity structure Contrary to the established view based on balance sheet is a risk-sharing outcome between debtors and creditors, much information, new evidence from transaction-level data shows of the policy discussion has focused on the need to understand that the increasing reliance of emerging market firms on debt the extent and causes of “short-termism,” as well as on the markets has been associated with long-term maturities, possibly Figure 3. Debt maturities in bond markets: Cumulative Figure 4. Size distribution of issuing firms, 1991-2014 distribution functions, 1991−2014 Firms in emerging markets that issue debt tend to be similar in size to their counterparts in advanced economies. 100 0.30 90 80 0.25 70 0.20 60 50 0.15 Percent 40 Density 30 0.10 20 Emerging economies, domestic markets Emerging economies, international markets 0.05 10 Advanced economies, all markets 0 0.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 -5 0 5 10 Maturity (years) Log of issuer size Emerging economies Advanced economies Source: Cortina, Didier, and Schmukler (2018). Note: These cumulative distribution functions show the share of bonds raised up to Source: Cortina, Didier, and Schmukler (2018). any given maturity (x-axis). Note: This figure plots firms’ total assets at the time of issuance. 2 Research & Policy Brief No.18 diminishing the risks associated with higher debt levels and advanced economies, including when comparing firms within the foreign currency financing (Cortina, Didier, and Schmukler 2018).