Home >industry >BIS cautions on increased overseas borrowings

Mumbai: An increase in overseas borrowings by corporate entities in emerging market economies (EMEs) could expose them to interest rates and currency risks unless adequately hedged, the Bank for International Settlements (BIS) said in a quarterly review released on 14 September.

The report also cautioned that there may be mismatches between foreign currency liabilities and assets of certain sets of corporate entities such as Chinese property firms and Indian energy and utility firms.

“Corporates in many EMEs have taken advantage of unusually easy global financial conditions to ramp up their overseas borrowing and leverage. This could expose them to increased interest rate and currency risks unless these positions are adequately hedged," said the BIS in its report.

Higher overseas borrowings without adequate hedging could make corporate balance sheets more susceptible to shocks, the report said, adding that these vulnerabilities could hurt the local financial system more broadly as well.

“Shocks to interest or exchange rates could generate damaging feedback loops if credit risk concerns were to prevent existing bank or bond market funding from being rolled over," warned the BIS report.

Overseas borrowings by companies in emerging economies have risen as a consequence of the low yield environment in developed economies, which has led investors to put money into higher yielding investments in emerging economies.

In particular, 2014 has seen a surge in foreign currency bond sales. According to a Bloomberg report dated 15 August, dollar bond sales from Asia stood at over $120 billion—97% of the amount raised through such notes in 2013.

In India too, overseas corporate borrowings have risen this year. Foreign currency bond sales by non-financial firms will hit a record $13-14 billion in 2014, Moody’s Investors Service said in a report on 27 August.

According to external commercial borrowings data from the Reserve Bank of India, Indian firms raised more than $20 billion in overseas loans and bonds between January and August this year. In 2013, close to $35 billion was raised.

“In this environment, the financial exposures of EME non-financial corporations, in particular, could have wider implications. Debt issuance in foreign currencies exposes these borrowers to roll-over and foreign currency risks. If such risks materialise, the creditworthiness of some corporations could worsen, pushing up bond yields," the BIS report said, adding that higher financing costs and tighter funding conditions for firms could then become a drag on economic growth.

The report also cautioned that balance sheet pressure on corporations could also subject banks and other intermediaries to funding stresses, as firms are forced to withdraw their deposits.

The report concluded that while cheap funding could boost economic performance if it supports viable investment projects, it inevitably increases the borrower’s interest rate, rollover and currency risks.

“Furthermore, some EME corporations may have used borrowed funds for purely financial (i.e. speculative) purposes. In other cases, these external positions may be inadequately hedged, whether through natural offsets or by the use of financial instruments. Overall, these factors have increased the risks facing these companies, implying the existence of ‘pockets of risk’ in particular sectors and jurisdictions," said the BIS.

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