Corporate debt poses systemic risks in emerging markets

The rapid increase in corporate leverage in emerging markets following the 2008 global financial crisis poses dangers not very different from the 1997 Asian financial crisis


According to a research, any negative fallout of the increase in credit to emerging market firms since the 2008 global financial crisis can be destabilizing for the emerging market economies.
According to a research, any negative fallout of the increase in credit to emerging market firms since the 2008 global financial crisis can be destabilizing for the emerging market economies.

Corporate debt in emerging economies might not be in any better shape compared to the situation in five Asian economies preceding the 1997 Asian financial crisis (AFC). While firm-level leverage (debt) ratios are still lower than the pre-AFC period, a host of other indicators like profitability, solvency and liquidity are in worse shape today, according to a research paper authored by Laura Alfaro, professor at the Harvard Business School, and others. The paper warns that any negative fallout of the increase in credit to emerging market firms since the 2008 global financial crisis can be destabilizing for the emerging market economies given the systemic importance of large and highly levered firms.

Also Read : Lessons Unlearned? Corporate Debt in Emerging Markets

Large currency devaluation likely hurts the poor more than the rich, according to research by Javier Cravino and Andrei A. Levchenko, professors of economics at the University of Michigan. Studying the episode of large devaluation in the Mexican peso in 1994, they show that prices of products consumed by the poor in Mexico rose at a much higher pace than the prices of items (and services) used by the rich. This is because the poor tend to consume more items in the “tradable sector”, i.e. items like food and fast moving consumer goods (FMCG) which are often imported or exported and hence affected by exchange rate movements. On the other hand, the rich spend relatively more on non-tradable items like personal services (entertainment or recreation) which are often less affected by currency movements.

Also Read: The Distributional Consequences of Large Devaluations

Housing market conditions affect timing of marriage, especially among men, suggests evidence from the Middle East and North Africa region, according to a recent research paper by Ragui Assaad, professor at the University of Minnesota, and others. This happens because youth increasingly want to set up their own nuclear households, which entails buying or renting a house. So policies or conditions which increase house prices/rentals are likely to lead to a postponement of marriage decisions. The paper cites evidence from Egypt and Jordan where affordable housing facilitated marriage and lists lack of rental housing as a reason for rising age of marriage in Tunisia.

Also Read: The role of housing markets in the timing of marriage in Egypt, Jordan, And Tunisia

Cheating is more widespread than is imagined and higher achievers tend to cheat more, reveals an experiment conducted on some economics students in Israel. In the first round of the experiment, the students appeared for a multiple-choice test on capitals of countries, with deliberately lax supervision. The same test was again conducted after two months but with much more strict supervision to prevent cheating. The difference in the performance across the two tests revealed the extent of cheating. Erez Siniver, professor at the College of Management Academic Studies in Israel, and others found that cheating was more prevalent among those with better grades. The paper also suggests that the extent of cheating might be much more than what is believed to be the case.

Also Read: Do Higher Achievers Cheat Less? An Experiment of Self-Revealing Individual Cheating

Donald Trump administration’s “Early Harvest” trade deal with China would not be of much help in changing US’s trade pattern with the Asian giant, says Brad W. Setser, an economist with Council for Foreign Relations in his blog Follow the Money. Setser says that China’s trade pattern of exporting thrice the amount of manufacturing imports from the US is representative of its global trading patterns, which involves importing commodities and raw materials and exporting finished products. Achievements such as China allowing US to export more beef and financial services would do little to reverse US’s trade deficit with China, which was one of Trump’s key poll promises. In fact, China’s push for self-reliance in products such as aircrafts, semiconductors, medical equipments etc. might increase China’s export surplus in manufactured goods in the days to come.

Also Read: China Still Wants to Import Commodities, Not Manufactures

Economics Digest runs weekly, and features interesting reads from the world of economics.

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