Why is Dollar Debt Cheaper? Evidence from Peru
72 Pages Posted: 8 Jun 2020 Last revised: 29 Sep 2021
Date Written: September 24, 2021
In emerging markets, a significant share of corporate loans are denominated in dollars. Using novel data that enables us to see currency and the cost of credit, in addition to several other transaction-level characteristics, we re-examine the reasons behind dollar credit popularity. We find that a dollar-denominated loan has an interest rate that is 2% lower per year than a loan in Peruvian Soles. Expectations of exchange rate movements do not explain this difference. We show that this interest rate differential for lending rates is closely matched by the differential in the deposit market. Our results suggest that the preference for dollar loans is rooted on the local household preference for dollar savings and a banking sector that is closely matching its foreign assets and liabilities. We find that borrower competitive pressure increases the pass-through of this differential.
Keywords: Emerging Market Corporate Debt, Currency Mismatch, Liability Dollarization, Carry Trade
JEL Classification: E44, G15
Suggested Citation: Suggested Citation