Emerging Markets Masking Corporate Foreign Debt, BIS Says

Foreign-debt levels of companies in emerging markets from China to India and Brazil are underestimated, threatening financial stability, the Bank for International Settlements said.

Companies are raising more foreign funds through their offshore affiliates and accounting practices understate the currency risk in such transactions, the Basel, Switzerland-based institution said in its quarterly report. Almost half of the $554 billion that the firms raised in the five years through 2013 came from the affiliates, the BIS said.

“Offshore subsidiaries of emerging-market non-financial corporates are increasingly acting as surrogate intermediaries,” raising money abroad and transferring it to their parent companies, economists led by Stefan Avdjiev wrote. “This trend could have important financial-stability implications. Yet, analysis of it is hindered by conceptual difficulties associated with statistical conventions on the measurement of cross-border flows.”

Overseas units transfer funds to their parents via direct loans, credit to unrelated companies and bank deposits, according to the BIS.

Capital Flows

China, Brazil and Russia together received at least $20 billion each quarter in 2011, 2012 and early 2013 via direct lending by affiliates. China also led the growth in foreign-money inflows through supplier credit.

External loan and deposit financing were seen to be prominent trends among countries including Chile, India, Korea, Hungary and Russia. Balance-of-payments data showed that such financial flows exceeded the BIS’s own figures by $550 billion between 2005 and 2013, signifying their increasing reliance on this channel to absorb foreign borrowings.

Capital flow through all these channels have increased in recent years, according to the report, authored jointly by Avdjiev with Michael Chui and Hyun Song Shin. The analysis was based on balance of payments figures from emerging markets combined with the BIS data on cross-border positions of banks.

Before it's here, it's on the Bloomberg Terminal.