debt composition and balance sheet effects of currency depreciation: a new database on firm level...

Debt Composition and Balance Sheet Effects of Currency Depreciation:

A New Database on Firm Level Data

Kevin CowanArturo Galindo

Inter-American Development BankResearch Department

Outline

• Why look at micro data.• Review of Microeconomic evidence:

existing and RED de Centros results.• The database on firm level liabilities.

The Micro-Evidence

• Previous presentations discussed findings using macro data.

• Pros of firm-level studies:– They bring richer and possibly better data to

bear on this issue.– They permit exploring how the effect of

devaluation varies with firm characteristics.– Ultimately mismatches generated at firm and

consumer level.

Banks and Mismatches

Existing Micro-Evidence

• Who holds d*?• How does it affect investment?


Who holds d*?– Martinez and Werner (2002), focus on Mexico

around Tequila crisis.– Dwor-Frecaut, Colaco, and Hallward-Driemeier

(2000), focus on East Asia.


How does the real exchange rate affect firm outcomes:

• No difference across liability structure: Campa and Goldberg (1999) and Nucci and Pozzuolo (2001) (industrial countries).

• Differential effects across firms with different levels of dollarized debt:

• Aguiar (2002), Mexico.• Bleakley and Cowan (2002), 5 Latin American countries.• Luengnaruemitchai (2004): East Asian countries.


• Why so few? Data are difficult to obtain, in particular data on currency composition.

• Six new papers (in Emerging Markets Review) financed by the IADB Research Network build on B&C’s work and study in great detail the cases of Argentina, Brazil, Chile, Colombia, Mexico, and Peru.

The Micro-Evidence• The first question is: “Do firms match their

liabilities with their revenues?”

The Micro-EvidenceCountry Do firms match currency of debt with their

production? Do size and Leverage matter?

Argentina NO: The coefficient of a tradable dummy is positive but not significant

YES: Large and more leveraged firms have more foreign currency debt

Brazil NO: The coefficient of a tradable dummy is positive but not significant

NO: Size and leverage are not correlated with debt composition

Chile YES: Export-oriented firms are more likely to report exchange rate losses


Colombia YES: Share of exports is significantly correlated with share of foreign currency debt


Mexico YES: Share of exports is significantly correlated with share of foreign currency debt


Peru YES: Share of exports is significantly correlated with share of foreign currency debt

NO: Size and leverage are not correlated with debt composition

The Micro-Evidence• The first question is: “Do firms match their liabilities with The first question is: “Do firms match their liabilities with

their revenues?”their revenues?”

• The second question is: “Do firms with dollar debt invest less after a depreciation?” (or, “is there a balance sheet effect?”)

tititiittitti XDeDI ,,*

,1*

,1, *

The Micro-EvidenceCountry Balance-Sheet Effect Argentina NEGATIVE AND SIGNIFICANT (FOR EXPECTED

DEVALUATION) Brazil NEGATIVE AND SIGNIFICANT

If time dummies are substituted with macro variables the effect becomes positive but not significant

Chile LARGE SWITCHES OF SIGN ACROSS SPECIFICATIONS Colombia NEGATIVE , MIXED SIGNIFICANCE (GREATER FOR EARNINGS) Mexico NEGATIVE AND MOSTLY SIGNIFICANT (ALSO FOR

EARNINGS) Peru NEGATIVE , MIXED SIGNIFICANCE

The Micro-Evidence

• The six studies present evidence that suggest:– There is some matching– But the presence of dollar debt never makes

depreciations more expansionary…– …and sometimes it makes them more contractionary

• This is important because it shows that balance-sheet effects may be a serious issue

Firm Level Database

• Based on the data collected for the IADB Research Network project.

• The original data was extended to:– Include more countries (CRI, URY)– Additional variables (not for all):

• Cross listing (ADRs)• Foreign Ownership• Homogeneous sector classification• Exports• Dollar Assets

The Sample of Firms

Country >1994 1994 1995 1996 1997 1998 1999 2000 2001

ARG 185 145 161 173 189 198 196 198 181BRA 316 143 232 252 251 262 255 233 215CHL 0 188 205 215 211 217 209 200 206COL 0 160 159 171 172 118 123 89 107CRI 14 30 30 26 22 31 27 23 23MEX 912 209 191 187 179 164 143 118 142PER 0 123 126 139 146 133 122 120 115URY 0 13 14 15 24 23 23 26 67Total 1427 1011 1118 1178 1194 1146 1098 1007 1056

Year

Coverage of Database

Distribution of Debt by Firm Category(dollar liabilities over total liabilities)

Mean Median Mean Median Mean Median Mean Median

Full Sample (a) 0.56 0.63 0.16 0.06 0.23 0.04 0.06 0.00

Non Tradeable Sectors 0.57 0.64 0.14 0.03 0.16 0.00 0.04 0.00Tradeable Sectors 0.55 0.62 0.17 0.08 0.34 0.28 0.06 0.00

No Exporters (X<10% sales) 0.55 0.61 0.18 0.14 0.18 0.01 0.05 0.00Exporters (X>10% sales) 0.66 0.70 0.25 0.23 0.49 0.48 0.08 0.00

Small Firms (assets < median) 0.48 0.52 0.18 0.14 0.12 0.00 0.02 0.00Big Firms (assets > median) 0.64 0.71 0.25 0.23 0.34 0.24 0.09 0.00

No Dollar Assets (DA<5% assets) 0.62 0.68 -- -- 0.17 0.00 -- --Dollar Assets (DA>5% assets) 0.58 0.62 -- -- 0.48 0.47 -- --

Full sample short term dollarization (b) 0.45 0.45 -- -- 0.20 0.04 0.03 0.00(b)/(a) 0.81 0.72 -- -- 0.85 0.96 0.61 --

COLARG BRA CHL

Distribution of Debt by Firm Category(dollar liabilities over total liabilities)

Mean Median Mean Median Mean Median Mean Median

Full Sample (a) 0.43 0.46 0.47 0.49 0.61 0.65 0.79 0.88

Non Tradeable Sectors 0.42 0.40 0.28 0.21 0.57 0.57 0.79 0.83Tradeable Sectors 0.47 0.49 0.63 0.68 0.69 0.76 0.79 0.89

No Exporters (X<10% sales) -- -- 0.33 0.28 0.61 0.65 0.74 0.82Exporters (X>10% sales) -- -- 0.52 0.56 0.60 0.66 0.85 0.94

Small Firms (assets < median) 0.31 0.23 0.32 0.27 0.32 0.26 0.78 0.83Big Firms (assets > median) 0.56 0.55 0.63 0.72 0.67 0.73 0.80 0.91

No Dollar Assets (DA<5% assets) 0.42 0.42 0.32 0.27 0.32 0.26 0.77 0.85Dollar Assets (DA>5% assets) 0.34 0.32 0.63 0.72 0.67 0.73 0.80 0.88

Full sample short term dollarization (b) 0.44 0.48 0.44 0.45 0.60 0.66 0.79 0.85(b)/(a) 1.02 1.06 0.92 0.92 0.99 1.00 0.99 0.97

URYCRI MEX PER

Distribution of Debt by Firm CategoryDollarization in the Tradeable and Non Tradeable Sectors (1994-2001)

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

COL CHL BRA CRI MEX ARG PER URY

Median Dollarization Ratio

Median Dollarization Ratio Non Tradeable

Distribution of Debt by Firm Category

(1) (2) (3) (4) (5) (6) (8) (9)

I (tradable sector) 0.062 0.066 0.067 0.065 0.066 0.007 0.024(0.013) *** (0.012) *** (0.012) *** (0.012) *** (0.012) *** (0.016) (0.021)

log (assets) 0.05 0.047 0.049 0.047 0.041(0.003) *** (0.003) *** (0.003) *** (0.003) *** (0.005) ***

I (exports) 0.144 0.141 0.089(0.014) *** (0.014) *** (0.019) ***

I (foreign owned) 0.025 0.022 0.013(0.014) * (0.014) (0.020)

I (issued adr) 0.062 0.06 0.039(0.021) *** (0.021) *** (0.031)

Dollar Assets over Total Assets 0.353(0.127) ***

Observations 8808 8808 8807 8807 8806 6791 6791 3792R-squared 0.39 0.46 0.46 0.46 0.46 0.41 0.41 0.44

Robust standard errors in brackets* significant at 10%; ** significant at 5%; *** significant at 1%

Dollar Liabilities over Total Liabilities

Determinants Dollar Debt: Full Sample 1994-2001

Distribution of Debt by Firm Category

I (tradable sector) 0.012 0.009 -0.071 0.065 0.067 0.181(0.027) (0.027) (0.029) ** (0.015) *** (0.015) *** (0.028) ***

log (assets) 0.02 0.016 0.012 0.045 0.037 0.05(0.006) *** (0.007) ** (0.006) * (0.003) *** (0.004) *** (0.004) ***

I (issued adr) 0.042 0.128(0.048) (0.026) ***

I (foreign owned) 0.038 0.018(0.025) (0.020)

Dollar Assets over Total Assets 0.429 0.358(0.056) *** (0.183) *

I(exported) 0.029 0.162(0.026) (0.018) ***

Observations 2670 2669 2337 1901 6138 6137 4454 2269R-squared 0.01 0.02 0.01 0.09 0.12 0.14 0.25 0.15

Robust standard errors in brackets* significant at 10%; ** significant at 5%; *** significant at 1%In bold, significant difference between samples.

Low Dollarization EconomiesHigh Dollarization Economies

Determinants Dollar Debt: Sample Split 1994-2001

(ARG, PER, URY)

Dollar Debt Over TimeArgentina

012345678

1995 1996 1997 1998 1999 2000 2001

Brazil

23456789

10

1995 1996 1997 1998 1999 2000 2001

Chile

-6

-4

-2

0

2

4

6

8

1995 1996 1997 1998 1999 2000 2001

Colombia

-0.4-0.2

00.20.40.60.8

1

1995 1996 1997 1998 1999 2000 2001

0

2468

10

12

14

1995 1996 1997 1998 1999 2000 2001 -4-202468

10121416

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Adjusted RER

Dollar Debt Over TimeCosta Rica

0

2

4

68

1012

14

1995 1996 1997 1998 1999 2000 2001

Mexico

-4-202468

10121416

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Peru

02468

10121416

1995 1996 1997 1998 1999 2000 2001

Uruguay

-8-6-4-202468

1995 1996 1997 1998 1999 2000 2001

Results for Chile

• Using IADB database Cowan, Hansen and Herrera (2004) find that:– Firms match income and assets with their liabilities.– Derivatives are a substitute for real hedges.– After properly controlling for currency composition of

income and assets significant negative Balance Sheet Effect.

– But “mismatches” in Chile are low, and drop after the exchange rate was floated in 1999.

Mismatches ChileDollar debt adjusted by forward position and dollar assets

(% total assets)

-1%

0%

1%

2%

3%

4%

5%

1995 1996 1997 1998 1999 2000 2001 2002

dollar debt - forw. - dollar assets (dollar debt - forw. - dollar assets) adj

Conclusions• Dollar denominated debt reduces the expansionary effects

of a depreciation…• Whether this effect is negative depends on the level of

dollar debt relative to tradable/exported output.• Dollar debt in the corporate sector was high and evenly

distributed across sectors in ARG, URY and PER.• But lower, and often falling, in countries such as MEX,

BRA and CHL. In these countries dollarization substantially higher in T-Sector.

Conclusions

• In most cases, increased exchange rate flexibility has been associated with lower liability dollarization.

• Exploring whether this relationship is causal is therefore a key research issue.

• Key policy questions:– How to de-dollarize or how to live with dollarization?– What role do the IFIs play in de-dollarization?