Template-Type: ReDIF-Paper 1.0
Author-Name: Stefan Avdjiev
Author-X-Name-First: Stefan
Author-X-Name-Last: Avdjiev
Author-Name: John Burger
Author-X-Name-First: John
Author-X-Name-Last: Burger
Author-Name: Bryan Hardy
Author-X-Name-First: Bryan
Author-X-Name-Last: Hardy
Title: New spare tires: local currency credit as a global shock absorber
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.
Creation-Date: 2024-07
File-URL: https://www.bis.org/publ/work1199.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1199.htm
File-Format: text/html
Number: 1199
Keywords: emerging markets, local currency debt, foreign currency debt, global factors, dollar debt
Classification-JEL: F30, G30
Handle: RePEc:bis:biswps:1199