Balance Sheet Effects in Colombian Non-Financial Firms

Abstract

work is licensed under a Creative Commons IGO 3.0 AttributionNonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose, as provided below. No derivative work is allowed.Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license.Following a peer review process, and with previous written consent by the Inter-American Development Bank (IDB), a revised version of this work may also be reproduced in any academic journal, including those indexed by the American Economic Association's EconLit, provided that the IDB is credited and that the author(s) receive no income from the publication. Therefore, the restriction to receive income from such publication shall only extend to the publication's author(s). With regard to such restriction, in case of any inconsistency between the Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives license and these statements, the latter shall prevail.Note that link provided above includes additional terms and conditions of the license. After building up foreign currency-denominated (FC) liabilities over several years, the balance sheets of Colombian firms might be particularly vulnerable to a shift in external conditions. This paper undertakes four exercises in order to get a better understanding of these vulnerabilities. First, probit/logit estimations are used to identify the firm-level and macroeconomic determinants of FC borrowing by non-financial corporations. Second, the implications of the balance sheet vulnerability for real activity are investigated. Evidence is found of an FC balance sheet effect that transmits exchange rate fluctuations to firm-level investment, and show that that this effect is asymmetric, much greater for depreciations than for appreciations. Third, using logit/probit estimations, it is shown that not all firms use forward exchange derivatives solely to hedge their FC liabilities. This might be a consequence of exchange rate intervention by the monetary authority, protecting against extreme exchange rate misalignments. Finally, results are reported of a survey-based qualitative analysis on the hedging policies and activities of 12 large non-financial firms. JEL classifications: E22, F31

The Real Exchange Rate, Innovation and Productivity: Heterogeneity, Asymmetries and Hysteresis

“…To sum up, firms maximize (13), (14), (15). r denotes the interest rate, which is constant due to capital mobility and our small-open-economy assumption.…”

“…We find similar numbers, thus confirming the representativeness of the four countries for their respective regions. 13 Due to the regional heterogeneity in relative export orientation, the model predicts qualitatively different effects of RER depreciations on average firm outcomes: (i) manufacturing firms from emerging Asia experience positive average effects of real depreciations on their revenue productivity (TFPR) growth and R&D activity; (ii) firms from other emerging countries (Eastern Europe and Latin America)…”

Effects of foreign currency debt on investment of the firms in emerging economy

“…The empirical evidence on Latin America offers intriguing insights. Barajas, Restrepo, Steiner, Medellín, and Pabón (2016) show that balance sheet effects in Colombia are asymmetric. One of the relevant empirical studies on balance sheet effects is that of Bleakley and Cowan (2008), whose empirical design is robust and extensive.…”

Currency Mismatches and Vulnerability to Exchange Rate Shocks: Nonfinancial Firms in Colombia

“…To shed further light on the results for firm-level characteristics, we refer to a survey of a sample of 12 large Colombian firms conducted during 2015-16, which is described in detail in Barajas et al (2016). More than half of the firms surveyed do not financially hedge their balance sheet exposure 30 at all, and less than a quarter hedge more than 25 percent of their exposure.…”