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| Did U.S. Monetary Policy Increase the Leverage of Non-Financial Corporations in Emerging Market Economies？ |
| TAN Xiaofen, LI Yuan, GOU Qin
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| School of Finance, Central University of Finance and Economics |
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Abstract To optimize the leverage structure of the non-financial corporate sectors, it is necessary to fully understand the factors that led to the recent rapid rise in the leverage of non-financial sector firms. It is worth noting that the rapid increase in the leverage ratio of non-financial enterprises in the post-crisis period is not a phenomenon unique to China, but also a general problem in the world's major emerging market economies. According to the statistics of the Bank for International Settlements, the leverage ratio of the non-financial corporate sectors in emerging market countries rose from 56.1% in the fourth quarter of 2008 to 102.6% in the fourth quarter of 2017, an increase of approximately 46.5%, with an average annual growth of approximately 5.2 percentage points. At the same time, the debt-to-GDP ratio of the non-financial corporate sectors in developed economies only rose from 87% to 92.7%. In addition to the domestic factors that have been widely discussed, we wish to examine whether there is a common factor behind the general increase in the leverage ratios of the non-financial corporate sectors in emerging market countries.
Following the global financial crisis, the U.S. and other developed countries introduced quantitative easing monetary policies to stimulate domestic economic growth. As the largest economy and the largest reserve currency country, the systemic importance and spillover effects of U.S. monetary policy are self-evident. For example, the implementation of quantitative easing in the U.S. resulted in currency appreciation, passive reduction in the domestic interest rates, rising asset prices, and an increased supply of credit in emerging market countries. These factors were conducive to increasing the scale of debt and financing opportunities, and reducing the financing costs of the non-financial companies in emerging market countries. This raises the question of whether the quantitative easing monetary policy in the U.S. leads to the rapid increase in the leverage ratio of non-financial firms in emerging market countries after the global financial crisis, and whether these factors are internally related. In view of the trend of the leverage of the non-financial corporate sectors in the emerging market countries and the movement of the shadow interest rates in the U.S., the rapid increase in the leverage of the non-financial corporate sectors can be seen to have coincided with the period when the shadow interest rates in the U.S. were negative. When the Fed first raised the interest rates after the financial crisis in December 2015, the federal funds rate range and shadow interest rates climbed, while the rapid upward trend in the non-financial corporate sector in emerging market countries leveled off or even showed a downward trend.
To answer the above questions more rigorously, this paper examines the relationship between the U.S. monetary policy and the leverage of non-financial enterprises in emerging market countries using the annual data of non-financial enterprises in 28 emerging market countries from 2003 to 2015. Furthermore, this paper examines the heterogeneities in the relationship between different enterprises, industries, and countries to provide an international perspective on the policy choices that can be used to reduce their leverage of China's non-financial enterprises. The results show that there is a significant negative correlation between the U.S. shadow interest rates and the change in the leverage ratio of non-financial enterprises in emerging market countries. That is, the reduction in the U.S. shadow interest rates leads to a substantial increase in the leverage ratio of the non-financial enterprises in emerging market countries. This means that the U.S. monetary policy significantly boosted the leverage of the non-financial firms in emerging market economie. Moreover, this impact is more pronounced for sectors that are highly dependent on external financing, for firms with more financial constraints, and for firms in more financially open emerging market economie with less flexible exchange rate regimes. Finally, a country's deeper financial development helps alleviate the impact of the U.S. monetary policy on the changes in the leverage ratio of the local non-financial companies. Moreover, from a global perspective, for the emerging market countries in Asia, the degree of the change in the leverage of the domestic non-financial companies is significantly more affected by the U.S. monetary policy than that of the rest of the world on average. These findings also indicate that when regulating the leverage ratios of non-financial sector firms, emerging market countries should not only consider their own domestic factors, but also attach great importance to the monetary policy adjustments in the U.S..
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Received: 02 January 2018
Published: 23 August 2019
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