Currency Depreciation and Emerging Market Corporate Distress

Abstract

How do emerging market corporates fare during periods of currency depreciation? We find that non-financial firms that exploit favourable global financing conditions to issue US dollar bonds and build cash balances are also those whose share price is most vulnerable to local currency depreciation. In particular, firms' vulnerability to currency depreciation derives less from the foreign debt, per se, but from the cash balances that are funded by foreign debt. Overall, our results point to the existence of a financial channel that operates through corporate balance sheets, undermines creditworthiness in an environment of dollar strength, and plays a role in transmitting external financial conditions to the domestic financial system.

Keywords: emerging market corporate debt, currency mismatch, liability dollarization, global financial conditions

JEL Classification: E44, G15