Transcript 200 kb PowerPoint presentation

Corporate Financing
Patterns, Performance and
Systemic Risk in Emerging
Markets
Sanket Mohapatra
Dilip Ratha
Phil Suttle
Columbia University
The World Bank
The World Bank
Washington DC
April 16th, 2003
The Willie Sutton principle
Willie....why do you rob banks?
The Willie Sutton principle
Willie....why do you rob banks?
...Because that’s where the money is!
The Willie Sutton principle
Willie....why do you rob banks?
...Because that’s where the money is!
This principle can be extended to
financial markets
The Willie Sutton principle
Willie....why do you rob banks?
...Because that’s where the money is!
This principle can be extended to
financial markets
Where do you get financial market
crises?
The Willie Sutton principle
Willie....why do you rob banks?
...Because that’s where the money is!
This principle can be extended to
financial markets
Where do you get financial market
crises?
...You get them where the money is!
Private corporate flows now dominate
financial flows to emerging markets
5%
1990
PNG
debt
27%
2001
Private corporate flows now dominate
financial flows to emerging markets
5%
PNG
debt
27%
200
$ billion
FDI
150
100
50
1990
2001
0
Debt flows to
public sector
'95
'96
'97
'98
'99
'00
'01
Private corporate flows now dominate
financial flows to emerging markets
5%
PNG
debt
27%
200
$ billion
FDI
150
100
50
1990
2001
0
Debt flows to
public sector
'95
'96
'97
'98
It thus becomes increasingly important for us to know
what the corporate sector in developing countries is up to
'99
'00
'01
Outline of rest of talk
 Risks associated with recent patterns in
corporate financing patterns and
performance – Phil Suttle
 External leverage and corporate
performance – Dilip Ratha
Key risks
 Information shortages
 Excess domestic leverage
 Excess external leverage
 Short-term debt vulnerability
 Profit disappointment risk
Information shortages
 Uncertainty over true state of balance
sheets
 Uncertainty over aggregate performance of
corporate sector
 Uncertainty over nature and magnitude of
off-balance sheet risks
Excess leverage
Corporate debt
Percentage of GDP
140
119
120
100
97
88
80
1995
1997
2001
60
40
30
16
20
33
34
35
22
0
East Asia and
Pacific
Europe and
Central Asia
Latin America and
Caribbean
Excess external leverage
Corporate foreign debt
Percentage of GDP
35
30
25
20
Latin America and
the Caribbean
Europe and
Central Asia
15
10
5
East Asia
and Pacific
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Short-term debt vulnerability
Short-term debt and current liabilities
Percentage of total debt
80
70
60
72
76
66
63
58
62
56
53
50
50
1995
40
1997
30
2001
20
10
0
East Asia
Latin America
Europe and Central
Asia
Profit disappointment risk
Developing countries: Corporate Profitability
Average of 12 major
emerging economies
Net income relative to sales, percent
Argentina
10
9
Brazil
8
Chile
India
7
Indonesia
6
Korea
5
Malaysia
4
Mexico
3
Pakistan
Not an encouraging trend
2
Peru
1
Thailand
0
Turkey
1985
1987
1989
1991
1993
1995
1997
1999
External debt
and corporate performance
 Benefits:
Cheaper financing
Larger, more diversified markets
Market discipline
 Risks:
Currency mismatch and devaluation risk
Maturity mismatch and roll-over risk
Global interest rate risks
Data
Worldscope+Bondware+Loanware
External market participants also had
high domestic leverage
Ratio of debt to assets (average, 1999-2001)
Percent
Non-participants
66
Market participants
53
52
46
All regions
EAP
Market participants paid lower interest
rates
Interest rate
Percent
9
Non-participants
8
7
6
Market
participants
5
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Market participants, however, were less
profitable
Profit as a share of assets
Percent
6
5
4
Non-participants
3
2
1
Market
participants
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Market participants with foreign sales
performed better
Profit as share of assets
Percent
8
7
With foreign sales
6
5
4
3
2
Market
participants
1
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
Firms that could roll over external debt
were less cyclical
Profit as a share of assets
Percent
6
5
4
Roll over firms
3
2
1
0
-1
No roll over
-2
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Crisis and the trade-off between devaluation
risk and interest rate risk
Effect of leverage on profits
Percent
Crisis affects all firms
But it affects external borrowers more
Devaluation risk dominated interest
rate risks
No crisis
Crisis
-0.15
-0.20
Non-participants
Market participants
-0.23
-0.28
Concluding thoughts
 We need to be more vigilant about
corporate financial risks in the developing
world, both domestic and external. We need
more information!
 External borrowing brings a number of key
benefits for corporates operating in weak
capital market environment, but also
obvious risks. In recent years, risks seem to
have outweighed benefits.