Rise in Emerging Market Corporate Debt Driven by Global Factors

Firm borrowing has quadrupled in past decade

Low interest rates, investor search for higher returns play role

Emerging markets must prepare for higher interest rates

Low interest rates in advanced economies such as the United States, Europe, and Japan have encouraged this borrowing. The increase in firms’ debt-to-asset ratio, commonly known as leverage, has often included a higher share of foreign-currency liabilities.

Incurring leverage can be beneficial, since it can facilitate investment and thereby faster growth—but it also entails risks.

In the latest research for the Global Financial Stability Report, the IMF said global factors such as low interest rates, investors in advanced economies’ search for higher returns, and commodity prices appear to have become relatively more important determinants in the rise in corporate debt in emerging market economies.

Emerging market corporate debt on the rise

The corporate debt of nonfinancial firms across major emerging markets rose sharply from about $4 trillion in 2004 to well over $18 trillion in 2014 (Figure).

The IMF said the emerging market corporate debt-to-GDP ratio had grown by 26 percentage points in the same period, but with notable differences across countries. While estimates of corporate leverage rose markedly in China and in Turkey, corporate indebtedness also rose appreciably in many Latin American countries, including for example, Chile, Brazil, Peru, Mexico, and Colombia.

The composition of emerging market debt has also changed. In particular, although bank loans still account for the largest share of corporate debt, the share of bonds has nearly doubled over the last decade, reaching 17 percent in 2014.

Dependence on favorable global financial conditions makes firms vulnerable

The IMF analysis finds that the relative roles of firm- and country-specific factors as drivers of borrowing and bond issuance in emerging markets have declined in recent years. Global factors appear to have become relatively more important determinants in the post-crisis period. Despite weaker balance sheets, emerging market firms have managed to issue bonds at lower yields and longer maturities.

“These developments make emerging market economies more vulnerable to a rise in interest rates, dollar appreciation, and an increase in global risk aversion,” said Gaston Gelos, Chief of the Global Financial Stability Analysis Division at the IMF.

Firms that have borrowed the most stand to endure the...