Kevin Cowan Arturo Galindo

1. Debt Composition and Balance Sheet Effects of Currency Depreciation:A New Database on Firm Level Data Kevin Cowan Arturo Galindo Inter-American Development Bank Research Department

2. Outline • Why look at micro data. • Review of Microeconomic evidence: existing and RED de Centros results. • The database on firm level liabilities.

3. 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.

4. Banks and Mismatches

6. Existing Micro-Evidence • Who holds d*? • How does it affect investment?

7. Existing Micro-Evidence Who holds d*? • Martinez and Werner (2002), focus on Mexico around Tequila crisis. • Dwor-Frecaut, Colaco, and Hallward-Driemeier (2000), focus on East Asia.

8. Existing Micro-Evidence 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.

9. Existing Micro-Evidence • 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.

10. The Micro-Evidence • The first question is: “Do firms match their liabilities with their revenues?”

11. The Micro-Evidence Country Do fir ms match currency of debt with their Do size and Leverage matter? production? NO : YES : Argentina The coefficient of a tradable dummy is Large and more leveraged firms positive but not significant have more foreign currency debt NO : NO Brazil The coefficient of a tradable dummy is : Size an d leverage are not correlated positive but not significant with debt composition YES : YES Chile E xport-oriented firms are more likely : Large and more leveraged firms to report exchange rate losses have more foreign currency debt YES YES Colombia : Share of exports is significantly : Large and more leveraged firms correlated with share of foreign currency debt have more foreign currency deb t YES : YES Mexico Share of exports is significantly : Large and more leveraged firms correlated with share of foreign currency debt have more foreign currency debt YES NO Peru : Share of exports is significantly : Size and leverage are not correlated correlated with share of foreign currency debt with debt composition

12. = a + b D + g + c + m + t + e * * I D * e D X - - i , t t 1 , i t t 1 , i i , t i t i , t The Micro-Evidence • The first question is: “Do firms match their liabilities with their revenues?” • The second question is: “Do firms with dollar debt invest less after a depreciation?” (or, “is there a balance sheet effect?”) ( )

13. The Micro-Evidence Country Balance - Sheet Effect NEGATIVE Argentina AND SIGNIFICANT (FOR EXPECTED DEVALUATION) NEGATIVE Brazil AND SIGNIFICANT If time dummies are substituted with macro variables the effect becomes positive but not significant Chile LARGE SWITCHES OF SIGN ACROSS SPECIFICATIONS NEGATIVE Colombia , MIXED SIGNIFICANCE (GREATER FOR EARNINGS) NEGATIVE Mexico AND MOSTLY SIGNIFICANT (ALSO FO R EARNINGS) NEGATIVE Peru , MIXED SIGNIFICANCE

14. 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

15. 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

16. The Sample of Firms

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

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

19. Distribution of Debt by Firm Category

20. Distribution of Debt by Firm Category

21. Distribution of Debt by Firm Category

22. Distribution of Debt by Firm Category

23. Distribution of Debt by Firm Category

24. Dollar Debt Over Time Adjusted RER

25. Dollar Debt Over Time

26. 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.

27. Mismatches Chile

28. 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.

29. 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?