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Leverage and currency mismatches: Non‐financial companies in the emerging markets
Author(s) -
Chui Michael,
Kuruc Emese,
Turner Philip
Publication year - 2018
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12627
Subject(s) - currency , leverage (statistics) , emerging markets , balance sheet , economics , profitability index , monetary economics , asset (computer security) , financial system , foreign exchange risk , currency board , business , finance , international economics , computer security , machine learning , computer science
Growing currency mismatches in the emerging market economies ( EME s) since 2010 have been driven by non‐financial companies. Their financing conditions were greatly eased by lower policy rates and a huge expansion in central bank balance sheets in major advanced economies. This has allowed these companies to increase their gearing, notably by greater foreign currency borrowing, thereby greatly increased the risk of currency mismatches. Microeconomic data show that it was not only companies providing tradable goods and services but also those producing non‐tradable goods which have increased their foreign currency borrowing. The across‐the‐board decline in EME companies’ profitability from mid‐2010 to mid‐2015 brought to light significant vulnerabilities and appeared to have constrained business fixed investment, and therefore growth, in the near term. But the strong external asset positions of the official sector in most EME s will help the authorities cope with these challenges.