From carry trades to trade credit: financial intermediation by non-financial corporations

Revised version, April 2023

BIS Working Papers  |  No 773  | 
11 March 2019



We study how firms in emerging market economies (EMEs) borrow and lend. We look at how firms exploit carry trades (eg when they can borrow in a low interest rate currency and lend in a high interest rate currency) and relate this to their borrowing activities and how they extend trade credit. We use a unique data set of non-financial firms in Mexico that includes detailed quarterly information on the currency and the structure of both assets and liabilities.


Non-financial firms provide a significant amount of financial resources to the economy, including trade credit. In EMEs, foreign currency credit plays an important role throughout the financial system. Cheaper foreign currency credit can lead firms to borrow in foreign currencies and build currency risk on their balance sheets. It can also affect real behaviour throughout the economy by leveraging those funds to support supply chains by extending trade credit. Regulation and supervision often focus on banks and other financial firms. However, non-financial firms are much less regulated in the ways they borrow and lend, or take on currency risk.


Non-financial firms borrow in foreign currency and acquire short-term assets in both local and foreign currency. A large part of these assets consists of trade credit extended to their customers and other firms, as well as cash and financial investments. When the difference between the local and foreign currency interest rates increases, the short-term foreign currency exposure of these firms increases, as do their sales and the amount of trade credit extended and received. Firms that take on foreign currency risk through this process cut back on their investment after a sudden exchange rate shock, but their trade credit networks remain stable.



We use unique firm-level data from Mexico to document that non-financial corporations engage in carry trades by borrowing in foreign currency (FX) and lending in domestic currency, largely in the form of trade credit, accumulating currency risk in the process. We show at a quarterly frequency that the practice of borrowing in FX and extending trade credit is more prevalent when foreign currency borrowing is relatively cheaper than local currency borrowing, and it is associated with expansions in both gross trade credit and sales. Firms that were more active in carry-trades, accumulating currency risk, experienced larger reductions in investment and profits following a large depreciation event. Nevertheless, their extension of trade credit remained stable, insulating their trading partners from the shock. A firm-level panel for 20 emerging countries provide external validity for the link between carry trades and trade credit.

JEL classification: E44, G15

Keywords: emerging market corporate debt, currency mismatch, liability dollarization, carry trades, trade credit