The Turning Tide: How Vulnerable are Asian Corporates?

Abstract

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. JEL Classification Numbers: F31, F41, F43, G01, G10, G15, G30, G31.

External Financing Dependence and Corporate Saving in ASEAN5

“…But for industries with EFD breaching a threshold, depreciation increases the net saving rate. Consistent with Jiang and Sedik (2019), this result implies that the competitiveness channel of the exchange rate will eventually be more than offset by the ©International Monetary Fund. Not for Redistribution negative balance sheet effect as firms' dependence on external funds increases.…”

Shocks and Capital Flows

“…Currency depreciations can be an important driver of corporate financial vulnerabilities in Asian emerging market economies. Using a firm-level database of 12 Asian economies over the period 1994-2016, corporate vulnerability is estimated by computing a summary indicator based on financial ratios that encapsulate profitability, leverage, liquidity, and solvency (IMF 2019, Annex I; Jiang and Saadi-Sedik 2019). This indicator can be interpreted as proxying a firm's probability of default.…”

Financial Development, Exchange Rate Fluctuations and Debt Dollarization

“…Meanwhile, using a large sample of firms from 66 countries, Dao, Minoiu, and Ostry (2017) find that depreciation boosts profit and investment in less developed financial markets, especially for firms whose use of labor is relatively intensive. Jiang and Sedik (2019) analyze the impact of exchange rate depreciation on the default probability of a sample of Asian nonfinancial firms and find the net impact to be negative for firms with a large issuance of foreign currency-denominated debt.…”