Abstract
This Selected Issues paper considers the case of Poland to analyze global financial spillovers to emerging market (EM) sovereign bond markets. Foreign holdings of Polish government bonds have increased substantially over the last decade. Although foreign participation in local-currency sovereign bond markets provides an additional source of financing and reduces sovereign yields, it has also given rise to concerns about increased sensitivity to shifts in market sentiment. The analysis in this paper suggests that foreign participation plays an important role in transmitting global financial shocks to local-currency sovereign bond markets by increasing yield volatility and, beyond a certain threshold, amplifying these spillovers.
Corporate Sector Vulnerabilities1
This chapter assesses nonfinancial corporate (NFC) sector vulnerabilities in Poland both at the firm level and at the cross-country macro level. While the stock of NFC debt in Poland is high relative to its peers, there are mitigating factors. Intercompany debt accounts for more than half of NFC external debt and an increasing share of debt securities is denominated in local currency. To the extent that foreign currency debt is hedged, FX shocks may pose only a moderate risk. Nonetheless, as in many emerging markets, noninvestment grade issuance of debt securities has increased and large interest rate shocks could have adverse ramifications.
A. Introduction
1. The 2008–09 crisis led to a sharp worsening of corporate sector health. In 2007, the anticipation of high returns led to a worsening saving-investment balance in the NFC sector along with high fixed investment growth above 15 percent. However, as the crisis hit, investment contracted in light of the deteriorating economic outlook and firms’ difficulty repaying debts. Nonperforming loans (NPLs) climbed, reaching around 12 percent of total loans by mid-2010 (and even higher for small- and medium-sized enterprises (SMEs)). Partly as a result, credit to NFCs contracted sharply, with year-on-year credit growth declining from more than 25 percent at end-2008 to close to -10 percent in the spring of 2010 and remaining negative for the remainder of the year. Bankruptcy cases in courts increased by about 60 percent during 2008–10 (Figure 1).
Poland: Corporate Sector Overview
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
2. The NFC sector appears to be gradually recovering. After a renewed deceleration in 2012, credit to NFCs is slowly picking up but remains low compared to other emerging markets (EMs) (Figure 2). Nonetheless, data on bankruptcies show encouraging developments with the 12-month sum down 6.8 percent year-on-year in March 2014 from growth of close to 20 percent a year earlier. While NPLs remain high, they have started to edge down.
Selected Countries: Credit to the Nonfinancial Sector
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
Sources: International Financial Statistics and IMF staff calculations.1/ November 2013.3. Recent turbulence in EMs has underlined how global financial flows can quickly reverse with implications for the NFC sector. While Poland weathered the unsettled financial markets at the onset of the U.S. Federal Reserve tapering talk in May 2013 as well as renewed volatility in early 2014, the events highlight the risks for EM economies as global interest rates rise on the back of monetary policy normalization. A potentially volatile adjustment path can have adverse consequences for corporate sector financing—in particular for companies with already strained balance sheets. In turn, a weakening corporate sector can quickly have macroeconomic implications through layoffs and increased unemployment.
4. Against this background, this chapter examines vulnerabilities of the Polish NFC sector. We first present stylized facts as a guide to potential vulnerabilities, examining stock and flow items to capture existing and building vulnerabilities. We then examine default risks and underlying weaknesses in the NFC sector associated with interest rate, profit, and exchange rate shocks. While stock indicators point to relatively stable sources of financing for Poland, flow indicators hint at emerging vulnerabilities. Nonetheless, the one-year ahead expected default frequency appears to be on an encouraging path.
B. Stylized Facts
The Stock
5. After increasing steadily since the mid-2000s, NFC debt declined in 2012.2 Total nonconsolidated NFC debt in Poland (including domestic and external debt) increased by about 15 percentage points of GDP to 83 percent of GDP from 2005 to 2011, like in many other emerging European countries. The increase was mainly on account of a 10 percentage point of GDP increase in long-term loans, which in 2011 reached 35 percent of debt (Figure 3). The share of short-term loans had remained relatively stable at around 10 percent of debt. More recently, moderate deleveraging has taken place, with total nonconsolidated NFC debt declining by close to 5 percentage points of GDP from 2011 to 78 percent of GDP in 2012, as other accounts payable (excluding trade credit) contracted. While Poland’s debt may appear high, next to relatively high NFC indebtedness in Europe, it does not stand out.
Selected Countries: Composition of Total Nonfinancial Corporate Debt
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
6. A large share of debt is associated with intercompany lending. While total intercompany debt—defined as the difference between total nonconsolidated and consolidated debt—has declined recently, it remains high at around 25 percent of GDP in 2012, accounting for just above 30 percent of total nonconsolidated debt. This is mainly due to other accounts payable, including trade credits, which amount to 27 percent of nonconsolidated debt. However, even after subtracting intercompany debt (which is substantial also in other emerging European economies), Poland’s NFC debt continues to look favorable relative to other countries in the region.
7. External debt is particularly important for assessing Poland’s corporate sector vulnerabilities in a cross-country perspective. Considering Poland’s economic size and financial depth, comparisons with other major emerging economies outside Europe are also important. However, data limitations constrain comparisons across a wide range of countries (see Box 1). Thus, we focus cross-country comparisons on external nonfinancial sector debt (for which data on the International Investment Position (IIP) is available across countries).
External NFC debt is high…
8. NFC external debt liabilities have continued to rise. While total nonconsolidated NFC debt in Poland (including domestic NFC debt) declined in 2012, external NFC debt continued its upward trend, reaching around 30 percent of GDP in 2012 from 17½ percent of GDP in 2000. However, most of the increase in external NFC debt took the form of intercompany debt, which grew from around 5 percent of GDP at end-2000 to around 17 percent of GDP at end-2012 (Figure 4).
Poland: Nonfinancial Sector International Investment Position and Debt
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
9. Poland’s external NFC debt surpasses that of many EMs, suggesting potential vulnerabilities. While external NFC debt in Poland is below or on par with that of other European countries in the German supply-chain (Hungary, Slovak Republic, and Czech Republic), it is high relative to non-European EMs. NFC external debt in India, Indonesia, and Mexico in 2012 accounted for less than 15 percent of GDP (Figure 5). Hence, Poland’s high external debt may present vulnerabilities, as large corporations with access to international capital markets may quickly face increasing financing costs if capital flows reverse, not least associated with Fed tapering or geopolitical turmoil in the region.
Selected Countries: Nonfinancial Sector External Debt and Intercompany Debt
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
…but there are a number of mitigating factors
10. Intercompany debt reduces vulnerabilities related to the external debt stock. Intercompany debt is a more stable source of financing than borrowing from international wholesale markets. For example, in case of unknown maturity, the IMF’s Balance of Payments Manual (IMF BPM6, 2009) allows for classification of intercompany lending as long-term lending given the nature of the relationship. As intercompany lending is less vulnerable to sudden stops linked to global market turmoil and general investor sentiment, it substantially reduces external vulnerabilities related to the total external debt stock. In Poland, external intercompany debt (measured by FDI debt instrument liabilities) accounted for close to 60 percent of total nonfinancial sector external debt in 2012—well above that in many major EMs. Hungary and the Slovak Republic, which are also participants in the German supply chain, tell a similar story. Nonetheless, trade shocks—not least related to the German supply chain—will affect also companies with intercompany debt.
Measuring Nonfinancial Corporate Debt
We explore nonfinancial sector vulnerabilities using several data sources to take advantage of their various strengths and mitigate their limitations. Our focus is on external NFC debt for cross-country comparisons, though to analyze Polish vulnerabilities we also use data on total NFC debt. While Polish data on NFC debt is available at a detailed level, external debt statistics for “other sectors” do not separate household and NFCs. However, the household share of nonfinancial sector external debt—which in turn accounted for about 40 percent of total external debt in 2013—is expected to be small.
Standard & Poor’s Capital IQ. The database contains detailed firm-level income statement and balance sheet information for Polish public and private NFCs. However, data availability is limited in the early period of the sample. Overall, for 2012 we include 372 nonfinancial companies, including real estate companies, (365 public and 7 private companies) after excluding companies with negative interest coverage ratio for the shock scenarios (see section C). On the contrary, in 2001, the sample size is limited to 16 companies. In sum, assets for the sample of firms in 2012 correspond to PLN 516,444 million (32 percent of GDP), while debt corresponds to PLN 96,334 million (6 percent of GDP or 7½ percent of total NFC debt as determined with Eurostat data). The dataset does not include information on the share of foreign currency debt nor on intercompany debt.
Corporate Vulnerability Utility. The IMF utility (Brooks and Ueda, 2011) consists of several different default risk indicators based on publicly traded firms listed in Worldscope in a number of countries. Market capitalization-weighted averages are used for comparability across countries. The sample size increases over time with a limited sample size in the early 2000s.
Moody’s KMV Credit Edge Plus. Moody’s KMV contains expected default frequencies (EDFs) for publicly listed companies, where the EDF measures the probability that a firm will default within one year. Hence, a firm with an EDF of 10 percent has a 1 in 10 chance of defaulting during the next year. We extract information for 452 companies, including information on which industrial sector they operate in.
Dealogic Analytics. The database includes country-level aggregates of NFC bonds and syndicated loan and equity issuance. The data are broken down by maturity, sector, and currency across emerging market countries. The database does not include information on intercompany debt.
Eurostat. The country-level financial balance sheet data for aggregate European NFC sectors include a breakdown of financial liabilities. This allows us to compute debt liabilities for the nonfinancial corporate sector as the sum of (i) loans, (ii) securities other than shares (excluding financial derivatives), and (iii) accounts payable. As data are available at the nonconsolidated and consolidated levels, intercompany debt is deduced as the difference between the two. However, intercompany NFC debt with nonresident affiliates—an important component for Poland—is not accounted for (Cussen and O’Leary, 2013). Furthermore, to our knowledge, consistent, non-European cross-country comparable data on total NFC debt are not available, limiting us to an analysis of European countries.
International Financial Statistics (IFS). The International Investment Position (IIP) provides a breakdown of aggregate external liabilities. This allows computing nonfinancial sector external debt liabilities for “other sectors” as the sum of (i) direct investment debt instruments (intercompany debt), (ii) other debt instruments under other investment liabilities, and (iii) portfolio investment debt securities. While “other sectors” include NFCs as well as households, household external debt tends to be small, allowing for inference about the corporate sector.
Quarterly External Debt Statistics (QEDS). The external debt statistics provide a breakdown of nonfinancial sector external debt into short- and long-term debt as well as separate out intercompany debt. However, for many countries, data on intercompany debt are not available, and the maturity breakdown in many cases abstracts from the intercompany components or assumes intercompany debt is exclusively long-term debt.
11. The stock of external NFC debt, excluding intercompany debt, is not out of line with that of emerging market peers and debt securities are increasingly in domestic currency. At around 12 percent of GDP, the stock of overall nonfinancial sector external debt, excluding intercompany debt, is slightly below the median country in the sample (Figure 6). Similarly, from a global perspective, Poland’s total stock (including domestic) of nonfinancial sector debt securities, at 10 percent of GDP, is lower than in many other EMs. In addition, an increasing share of NFC debt securities (38 percent in 2013 compared to 6 percent in 2000) is denominated in domestic currency, reducing balance sheet risks associated with exchange rate depreciation (Figure 7).
Selected Countries: Maturity Breakdown of Nonfinancial Sector External Debt
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
Poland and EMs: Composition of Nonfinancial Sector External Debt
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
12. While the share of short-term external debt is high, the overall stock of short-term external debt is manageable. As of end-2013, short-term external debt accounted for about 33 percent of total nonfinancial sector external debt, excluding intercompany debt (though the share is close to unchanged when including intercompany debt), above the median country in the sample, as well as Mexico, South Africa, and Turkey. However, the stock of short-term debt, excluding intercompany debt, is manageable, at around 4 percent of GDP.
The Flow
While stock data do not present major concerns, flow data point to some vulnerabilities...
13. Rollover needs are high. As of end-2013, overall external NFC debt, including loans, trade credits, and other types of debt, accounting for about 12 percent of GDP, had to be rolled over or paid off during the subsequent 12 months. Of this, close to 60 percent represented intercompany debt, which would presumably by easier to roll over than wholesale financing (Figure 8).
Selected Countries: Debt Outstanding, Rollover Needs, and Debt Issuance
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
14. The surge in global liquidity has given borrowers in Poland with lower credit ratings access to international finance. While the outstanding stock of non-investment grade3 debt securities remains manageable at around 3 percent of GDP in Poland, the quality of NFC issuance has deteriorated rapidly. A similar trend is observed in other EMs. Non-investment grade issuance reached more than 80 percent of total NFC securities issuance in 2013 (50 percent in 2012) and is now above the median EM. However, given the global and European economic and financial crises, it is difficult to separate the effect of higher non-investment grade issuance (high-risk issuance) from potential generalized ratings downgrades globally (including of the sovereign) during that time.
…though vulnerabilities remain contained.
15. International corporate bond issuance is modest, and the currency and debt profiles of debt securities are sound. International corporate issuance has been moderate, below that in emerging Europe and other EMs, where global liquidity has supported foreign currency bond markets relative to equity and syndicated loan issuance (Figure 9). In addition, Poland’s currency structure and debt profile compare favorably with other EMs. The foreign currency share in overall NFC debt issuance has started to decline as more borrowers are able to borrow in local currency, and foreign currency issuance is below that of many other EMs. Further, Poland has lower debt to equity issuance than other EMs, resulting in declining debt to equity ratios.
Poland and EMs: Nonfinancial Sector Securities Issuance
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
Vulnerability Indicators
Firm-level balance sheet indicators point to some areas of vulnerability...
16. Balance sheet ratios and income statement items provide valuable insight into the health of the corporate sector. We assess corporate sector health and vulnerabilities in Poland in a cross-country perspective, using information from the IMF’s Corporate Vulnerability Utility (CVU) (Brooks and Ueda, 2011). We consider indicators that capture accounting ratios, including leverage, liquidity, profitability, and valuation, as well as other indicators, including external financing and default risk.4
17. Accounting ratios suggest moderate vulnerabilities in Poland’s NFC sector (Figure 10).
Leverage. After a decade of decline, total liabilities to total assets in Poland have stabilized at just above 40 percent. However, short-term debt to total debt picked up slightly in 2012. Nonetheless, Debt to equity and debt to assets are low relative to other emerging markets.
Liquidity. The current ratio (current assets relative to current liabilities) and the quick ratio (which nets out inventories from current assets) measure firms’ ability to pay short-term obligations with easily convertible assets. These both deteriorated in Poland in 2012 as the economic environment worsened. As a result, these measures place Poland among emerging markets that are relatively vulnerable.
Profitability. Return on assets (RoA) and return on equity (RoE) declined in 2012 in Poland, approaching levels last seen in 2008.
Valuation. Tobin’s Q captures the market value of debt and equity relative to the current replacement cost of assets. In the case of perfect markets and absent measurement error, Tobin’s Q will equal 1 as there will otherwise be incentives to invest further (>1) or a merger and acquisition is advantageous (<;1). In practice, however, Tobin’s Q above 1 may occur when a company is facing financial constraints, for example for a promising start-up company that is valued by the stock market but is facing a binding borrowing constraint and operates with low total assets. In Poland, Tobin’s Q was in 2012 only slightly above one, suggesting relatively efficient markets.
Selected Countries: Vulnerability Indicators
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
...but default risk has declined recently.
18. Default probabilities are improving. The Altman Z-Score and Ohlson O-Score, converted into probabilities, as well as the Black-Scholes-Merton (BSM) Default Probability5 all consistently show a slight decline in 2012 to between 1.5 percent (BSM probability) and 8 percent (Z probability), though the indicators remain above their 2010 levels. The distance-to-default (which also serves as an input to the default probability) measures how much the asset value must fall during the year for a firm to default based on the current balance sheet position. Corresponding to the decline in distress indicators, the distance to default increased in 2012.
19. High-frequency data confirm that default risk is declining across several sectors. Moody’s KMV computes the one-year-ahead probability of default at the firm level. While the 90th percentile of the companies in the sample remained high in early 2014 at above 15 percent, the median probability is low at less than 1 percent. Indeed, the improving conditions during 2013 occurred across a number of industries, in particular construction and real estate development. And relative to default probabilities above 10 percent for more than 50 percent of companies in the durable consumer products segment in early 2009, the median company in this segment recently recorded a default probability of only around ½ percent (Figure 11).6
Poland: High-Frequency Vulnerability Indicators
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
C. Resilience to Shocks
20. In order to quantify corporate sector vulnerabilities, we explore the sensitivity of debt at risk to various shocks. Considering the high rollover needs, we assess which types of shocks may be associated with the most acute vulnerabilities. First, based on firm-level data, we compute the interest coverage ratio (ICR) as earnings before interest and taxes (EBIT) relative to interest expenses. ICR measures the debt-servicing capacity for a firm such that firms with ICR below 1 are classified as distressed or in theoretical default.7 We then define debt at risk as the share of total corporate debt associated with an ICR below one, following the approach in IMF (2009 and 2011) and explore how the share of debt at risk changes when firms are subject to interest or profit shocks. Second, we estimate the FX loss on debt from 30 percent exchange rate depreciation.
Data
21. We use firm-level data for the interest rate and profit shocks. We base the sample on public and private nonfinancial companies, including real estate companies, located in Poland, from Standard & Poor’s Capital IQ database. However, as the share of private companies in the sample is relatively small, results could be sensitive to expanding the set of companies.
22. After increasing sharply in 2008–09 as global financial conditions tightened, debt at risk worsened again in 2011–12. From less than 5 percent of debt in 2007, the share of debt at risk captured in the sample sharply deteriorated, reaching 25 percent of debt in 2009. While conditions improved markedly the following year along with somewhat calmer global financial markets and cost of borrowing around its 10-year low, renewed financial market turmoil in 2011 again started to worsen corporate sector conditions. By 2012, debt at risk had increased to above 10 percent of debt. This is similar to findings in IMF (2014a) for Poland, which put debt at risk on par with that in India and South Africa but above that in Colombia, Malaysia, and Mexico.8 However, a substantial share is likely related to intercompany debt, though firm-level data limitations prevent a complete breakdown from this perspective.
Sensitivity to shocks
Stress tests indicate moderate vulnerabilities, though large shocks could cause strains...
23. We consider four shocks: an interest rate increase, a decline in profits, a combined interest rate and profit shock, and an exchange rate shock. The interest rate and profit shocks are done at the firm level, while the exchange rate shock is done at an aggregate level due to data limitations.
- Interest rate shock. We define the baseline interest rate on debt as interest expense in year t relative to last year’s debt. 9 We then apply a severe 500 basis point shock to the baseline rate. Hence, interest expense in the shock scenario can be computed as:However, the interest rate shock could potentially increase the return on financial assets, defined as the sum of marketable securities, investment securities, and cash and bank balances. As the interest rate on domestic loans likely exceeds the return on equity and foreign currency-denominated assets, we assume the return on financial assets increases by 300 basis points (instead of 500 basis points). In the case of increased return on financial assets, the higher EBIT in the shock scenario is as follows:10We also explore the effects of abstracting from changes in the return on financial assets altogether, in which case EBIT is unaffected by the shock:11ICR in the shock scenario is then given as:
- Profit shock. We shock operating income (equivalent to EBIT) directly by assuming a 25 percent decline:
Combined interest rate and profit shock. For completeness, we consider an adverse combined shock, consisting of an interest rate hike and a decline in profits as set out above. This allows examining risks associated with large, widespread shocks. In this scenario, we assume that returns on financial assets do not improve as the interest rate on debt increases.
Exchange rate shock. As firm-level data on the currency composition of NFC debt is not available in the S&P Capital IQ database, the exchange rate shock is done at an aggregate level, following the approach in IMF (2014b). We employ the sum of individual firms’ debt and combine it with the information that close to 40 percent of total NFC debt (including intercompany debt) is external debt and that 66 percent of external debt of the NFC sector is in foreign currency (FX).12
We consider the effect of 30 percent exchange rate depreciation. The FX loss on debt is then computed as the sum of the FX loss on the debt principal and the FX loss on foreign currency interest expense. To assess the impact of the shock, we assess the total FX loss relative to total EBIT for the firms in the sample. In addition, as intercompany debt may work as a stabilizing factor, we assess the FX loss both with and without adjusting aggregate shares (related to total external NFC debt) for intercompany debt. In turn, the FX loss on the debt principal and interest expense are approximated as:
FX loss from valuation of principalof which the FX loss associated with principal due in 2014 is:
FX loss on principal due in 2014Here, maturing FX debt relative to total FX debt outstanding is proxied by the share of maturing FX denominated debt securities from the Dealogic database. The sum of debt at the firm level corresponds to aggregate debt from Capital IQ, corresponding to that employed in the interest and profit shocks above. ER depreciation denotes the 30 percent exchange rate depreciation, while the hedge ratio allows for varying degree of currency hedging of foreign currency debt, which can mitigate losses. As information on financial hedging is not easily available, we explore the results under different assumptions for the hedge ratio: no hedging, 50 percent hedge ratio, and 80 percent hedge ratio.
The FX loss on FX interest expense is approximated as:
FX loss on interestHere, the sum of firm-level interest expense corresponds to aggregate interest expense from the sample of firms employed above from S&P Capital IQ.
24. The results suggest that Poland’s corporate sector is vulnerable to large interest rate shocks (Figure 12). A significant increase in interest rates, which is quickly translated into higher corporate borrowing costs, combined with a 25 percent adverse profit shock could more than double debt at risk to reach around 35 percent of debt. While the baseline debt-at-risk is on par with that for the United Kingdom in IMF (2011), the effect of shocks appears somewhat larger.13 However, while the analysis here assumes debt is generally tied to variable interest rates, potential prevalence of fixed-rate debt would mitigate the impact of the shock. Moreover, intercompany debt may be less subject to interest-rate risk, depending on how they are priced and the type of shock (global vs. Poland-specific).
Poland: Responses to Shocks
Citation: IMF Staff Country Reports 2014, 174; 10.5089/9781498367868.002.A002
25. To the extent that FX debt is hedged, FX shocks appear more manageable. The estimated loss on FX debt maturing in 2014 from 30 percent zloty depreciation is manageable (below 5 percent of EBIT). Nonetheless, in the absence of currency hedges, the total valuation effect (accounting for the full amount of outstanding FX debt) could be substantial (around 20 percent of EBIT)—though natural hedges, abstracted from here, may be a mitigating factor. In addition, intercompany debt could reduce the risk associated with FX shocks. While data are not available to abstract from intercompany debt at the firm level, it is possible to exclude intercompany debt from the total NFC aggregates in Poland. As such, in the extreme example of fully excluding intercompany debt from the aggregate shares, the estimated valuation loss related to 30 percent zloty depreciation could be substantially lower.
D. Conclusion
26. NFC debt, and accompanying rollover needs, in Poland are high. While Poland’s NFC debt does not stand out relative to that in other emerging European countries, external NFC debt is high when compared to non-European emerging markets. In addition, the stock of nonperforming loans is high in the corporate sector (particularly among SMEs), noninvestment grade bond issuance has increased recently, and rollover needs are substantial. Taken alone, this raises concerns.
27. However, there are a number of mitigating factors. The share of intercompany debt in total NFC external debt is high. To the extent that intercompany debt is less vulnerable to sudden stops than wholesale funding, this should help alleviate rollover risks. In addition, default risk has declined across most sectors, debt–to-equity ratios are declining, and more borrowers are able to issue debt in local currency, moderating potential FX risks.
28. Although overall vulnerabilities in Poland’s nonfinancial sector appear manageable, large shocks could pose a concern. In the face of small to moderate shocks, debt at risk remains contained. The potential impact of FX shocks depends on the extent of hedging—little or no hedging could result in substantial valuation losses, while more significant hedging would lead to much lower losses. Similarly, severe interest rate shocks could pose a risk (though all debt may not be subject to variable interest rates). However, intercompany lending would likely mitigate potential default concerns.
References
Brooks and Ueda, 2011, “User manual for the Corporate Vulnerability Utility”, The 4th Edition, International Monetary Fund.
Cussen, Mary and Bridin O’Leary, 2013, “Why are Irish Non-Financial Corporations so Indebted?”, Quarterly Bulletin 01, January.
IMF, 2009, “India. Selected Issues”, Chapter I: India’s Corporate Sector: Coping with the Global Financial Tsunami by Hiroko Oura and Petia Topalova, IMF Country Report No. 09/186, International Monetary Fund, June.
IMF BPM6, 2009, “Balance of Payments and International Investment Position Manual”, Sixth Edition, International Monetary Fund.
IMF, 2011, “United Kingdom: Vulnerabilities of Household and Corporate Balance Sheets and Risks for the Financial Sector Technical Note” by Marta Ruiz-Arranz, IMF Country Report No. 11/229, International Monetary Fund, July.
IMF, 2014b, “Global Financial Stability Report. Moving from Liquidity- to Growth-Driven Markets”, International Monetary Fund, April.
IMF, 2014b, “Global Financial Stability Report. Moving from Liquidity- to Growth-Driven Markets”, Annex 1.2 by Julian Chow, Evan Papageorgiou, and Shamir Tanna, International Monetary Fund, April.
Prepared by Lone Christiansen (EUR) and Annette Kyobe (SPR). We thank participants at the seminar in Warsaw (Poland) for the very useful discussion.
NFC debt is defined as the sum of liabilities associated with securities other than shares (excluding financial derivatives), loans, and other accounts receivable/payable based on Eurostat data. Nonconsolidated data include intercompany debt, which is excluded from consolidated data. Nonfinancial sector external debt is computed as the sum of liability debt components for “other sectors” in the IIP (direct investment debt instruments (intercompany debt), other debt instruments under other investment liabilities, and portfolio investment debt securities) based on IFS data.
Non-investment grade issuance includes non-rated issuance.
Countries included from the CVU are: Argentina, Brazil, Bulgaria, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Romania, Russian Federation, Saudi Arabia, Slovak Republic, Slovenia, South Africa, Thailand, Turkey, Ukraine, and Venezuela.
The Altman Z-Score is a measure of distress, combining five accounting ratios into a single statistic. The Ohlson O-Score is a measure of the one-year-ahead default probability, combining nine accounting ratios into a single statistic. The BSM default probability is based on a theoretical asset-pricing model.
The distribution of expected default frequencies may be affected by a varying sample size across time.
While an alternative is to base the analysis on earnings before interest, tax, depreciation, and amortization (EBITDA), we choose to use EBIT, as the threshold of 1 is mainly established for this definition.
IMF (2014a) defines ICR as EBITDA relative to interest expense; hence adjusting for depreciation and amortization.
Outliers where the baseline interest rate was above 50 percent or the baseline ICR was negative were removed.
Missing observations for financial assets are set to zero.
Abstracting from potential positive effects on financial assets did not materially change the results given their limited importance in the sample.
NBP, external debt statistics.
IMF (2011) found that debt at risk increases from around 10 percent of total corporate debt under the baseline to around 17 percent of debt following a 30 percent profit shock combined with a 300 basis point interest rate shock, though with substantial variation across sectors.
