On Corporate Borrowing, Credit Spreads and Economic Activity in Emerging Economies: An Empirical Investigation

50 Pages Posted: 18 Oct 2017 Last revised: 18 Nov 2021

See all articles by Julián Caballero

Julián Caballero

Inter-American Development Bank (IDB)

Andrés Fernàndez

Inter-American Development Bank (IDB) - Research Department

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Date Written: October 17, 2017

Abstract

We document a considerable increase in foreign financing by the corporate sector in emerging economies (EMEs) since the early 2000s, mainly in the form of bond issuance, and claim that it has opened up an important channel by which external financial factors can drive economic activity in these economies. Such claim is substantiated by a strong negative relationship between economic activity and an external financial indicator that we construct for several EMEs using micro-level data on spreads of bonds issued by EMEs’ corporations in foreign capital markets. Three salient features characterize such a negative relationship. First, the financial indicator has considerable predictive power on future economic activity in these economies, even after controlling for other potential drivers of economic activity such as movements in sovereign risk and global financial risk, among others. Second, on average, an identified adverse shock to the financial indicator generates a large and protracted fall of real output growth in these economies, and between 11 to 20 percent of its forecast error variance is associated to this shock. Lastly, fluctuations in this indicator also respond strongly to shocks in global financial risk emanating from world capital markets, thereby implying that changes of our indicator also serve as a powerful propagating mechanism to changes in global investors’ appetite for risk.

Keywords: Corporate bond issuance, spreads, economic activity, emerging economies

JEL Classification: E32, E37, F34, F37, G15

Suggested Citation

Caballero, Julián and Fernandez, Andres, On Corporate Borrowing, Credit Spreads and Economic Activity in Emerging Economies: An Empirical Investigation (October 17, 2017). Bank of Finland Research Discussion Paper No. 31/2017, Available at SSRN: https://ssrn.com/abstract=3055066 or http://dx.doi.org/10.2139/ssrn.3055066

Julián Caballero (Contact Author)

Inter-American Development Bank (IDB)

1300 New York Avenue NW
Washington, DC 20577
United States

Andres Fernandez

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

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