Non-financial corporations as financial intermediaries and their macroeconomic implications: an empirical analysis for Latin America

This chapter focuses on the role of non-financial corporations as financial intermediaries in Latin America (LAC). Non-resident corporates in the region – foreign affiliates of LAC firms – have been sending the proceeds of international bond issues, a major source of cross-border finance, to be invested in LAC through several channels. The focus is placed on intercompany loans. Although intercompany loans are classified as foreign direct investment in balance-of-payments statistics, these behave like portfolio flows, making economies more vulnerable to short-term fluctuations, thus hardening the external constraint and raising financial stability and fragility concerns. Intercompany loans are highly correlated with the business cycle in several Latin American countries, and this relationship becomes even more clear during crisis periods. Intercompany loans are key to understanding the extent to which the business cycle in Latin America is driven by internal/external factors and the transmission mechanisms linking external to internal conditions.