Foreign Currency Borrowing, Balance Sheet Shocks and Real Outcomes

99 Pages Posted: 7 Jan 2019

See all articles by Bryan Hardy

Bryan Hardy

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: November 22, 2018

Abstract

Emerging market firms frequently borrow in foreign currency (FX), but their assets are often denominated in domestic currency. This behavior leads to an FX mismatch on firms balance sheets, which can harm their net worth in the event of a depreciation. I use a large, unanticipated, and exogenous depreciation episode and a unique dataset to identify the real and financial effects of firm balance sheet shocks. I construct a new dataset of all listed non-financial firms, matched to their banks, in Mexico over 2008q1-2015q2. This dataset combines firm-level balance sheets and real outcomes, currency composition of both assets and liabilities, and firms' loan-level borrowing from banks in peso and FX. This data allows me to control for shocks to firms' credit supply to identify the balance sheet shock and examine its real consequences. I find that non-exporting firms that have a larger FX mismatch experience greater negative balance sheet effects following the depreciation. Among these, smaller firms see a decrease in loan growth, resulting in stagnant employment growth and decreased growth in physical capital relative to firms with smaller FX mismatch. Larger firms with a large FX mismatch also have lower growth in FX loans following the shock, but are able to increase borrowing in peso loans, resulting in relatively higher growth in employment and physical capital. My results imply that firms are subject to net worth based borrowing constraints, and that these constraints are more binding on smaller firms and for loans in FX.

Keywords: [balance sheet shocks, credit rationing, currency risk, foreign currency, corporate finance, bank lending, investment

JEL Classification: E44, F31, F41, F44, G31, G32

Suggested Citation

Hardy, Bryan, Foreign Currency Borrowing, Balance Sheet Shocks and Real Outcomes (November 22, 2018). BIS Working Paper No. 758, Available at SSRN: https://ssrn.com/abstract=3302313

Bryan Hardy (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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