The boom in corporate borrowing in East Asia and Latin America

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Following the global financial crisis, emerging market firms significantly expanded the amount of financing raised in bond markets. Many of the current discussions in academic and policy circles focus on international bond financing. They argue that this expansion has been driven by an increased appetite for emerging market bonds by foreign investors. Whereas the growth in international bond issuance is well documented, not much is known about the issuance of domestic bonds by emerging market borrowers.

In a new Research & Policy Brief, we provide a summary of recent research on the role of domestic and foreign bond markets in the rise of emerging market corporate debt after the global financial crisis of 2008-2009. We focus on East Asia and Latin America, which together accounted for about 90 percent of the total amount raised in corporate bonds by emerging economies between 2010 and 2019.

Following the global financial crisis, corporate bond issuance doubled among East Asian and Latin American economies. However, the two regions exhibited contrasting patterns in terms of use of domestic and international markets. Bond financing in East Asia was conducted through domestic markets, in domestic currency. In contrast, bond financing in Latin America was conducted through international markets, in foreign currency (Figure 1).

Firms borrowing in international markets are typically larger than those borrowing in domestic markets. True to form, the growth in bond market activity in East Asia was generated by smaller issuing firms than in Latin America. In 2016, the median issuer firm in Latin America was about ten times larger than in East Asia.

Figure 1. Domestic and Foreign Currency Corporate Bond Issuances

Figure 1: Domestic and Foreign Currency Corporate Bond Issuances
Note: This figure shows, for each region, the share of corporate bond financing raised in domestic and foreign currency for the median economy each year. Source: Abraham et al. (2021).

The pattern of issuance activity in Latin America is in line with the arguments in current discussions in that they appear to have been fostered by foreign investor demand. But what caused the acceleration in domestic bond issuances in East Asia? Was it driven by an increased appetite for domestic bonds by investors (supply-side expansion) or by a higher demand of capital by firms (demand-side expansion)? 

In our research we find evidence consistent with a supply-side expansion as the main force driving the acceleration in domestic bond issuance in East Asia. The cost of issuing domestic bonds declined after the global financial crisis, relatively smaller new issuers increased their leverage more than larger firms already issuing bonds, and firms hoarded large shares of the bond proceeds in cash. Domestic investors, with substantial and growing funds, seemed to be a key reason for the expansion in the supply of domestic funds.

These regional differences in the features of domestic and international bond markets point to differences in risk exposure among firms in East Asia versus those in Latin America. Risks in Latin America have been linked to large firms borrowing foreign-currency debt from foreign investors (increasing exposure to external factors and currency depreciations). Risks in East Asia have been more related the increasing debt accumulation by relatively smaller firms, as these firms tend to issue bonds at shorter maturities and have fewer financing options during financial crises.

References

Abraham, F., J.J. Cortina, and S.L. Schmukler. 2021. “The Boom in Corporate Borrowing after the Global Financial Crisis: Different Tales from East Asia and Latin America." Research and Policy Brief No. 42, World Bank Chile Center and Malaysia Hub. Long version forthcoming in the Revue D’ Economie Financière.