Sensitivity of Emerging Market Corporate Borrowing Spreads to Global Financial Conditions

Global financial conditions (GFC) considerably influence emerging markets (EM) firm dynamics. Albeit a vast literature on the vulnerability of EM firms to GFC, no study assesses the sensitivity of EM firm credit risk to GFC by looking at the sensitivity of borrowing spreads of EM firms to GFC. We fill this gap by calculating borrowing spreads for nearly 12000 non-financial firms from 13 EMs, analyzing the sensitivity of the spreads to GFC, and documenting the role of country fundamentals and firm characteristics. Using three levels of data—firm-level microdata, country-level macro data, and global financial data— and panel regressions, we document a clear pattern of EM firms’ vulnerability to the GFC by illustrating significant global financial effects on the credit risk premium of EM firms. Specifically, we find that the firm-level borrowing spreads widen once the GFC tightens, suggesting that the perceived riskiness of EM firms, i.e., the credit risk premium, increases when the GFC tightens. We highlight the importance of country fundamentals and firm characteristics in the sensitivity of EM firms’ borrowing spreads to GFC: (i) EM firms with weaker characteristics display more sensitivity to GFC; (ii) EM firms from risky EM countries are more exposed to the effects of GFC. Finally, we also find that currency depreciation increases the firm-level borrowing spreads, which is consistent with the risk channel of the exchange rate.