The International Monetary Fund, yesterday, called for stronger financial regulation to protect banks from corporate failure.
This was one of the recommendations made by the Fund in its Global Financial Stability Report issued yesterday.
The report warned that emerging markets should brace for a rise in corporate failures as a debt-bloated firms struggle with souring growth and climbing borrowing costs.
It noted that the easy money policy pursued by central banks around the world in response to the global financial crisis has occasioned a huge rise in corporate debts in emerging economies.
Then, emerging markets were the drivers of global growth. Developing-country firms quadrupled their borrowing from around $4 trillion in 2004 to well over $18 trillion last year, with China accounting for a major share.
Now, prospects in industrialising economies are weakening fast even as the U.S. Federal Reserve is getting set to raise interest rates for the first time in nearly a decade, a move that will raise borrowing costs around the world. The burden of 26% larger average corporate debt ratios and higher interest rates come as commodity prices plummet, a staple export for many emerging-market economies. Compounding problems, many firms borrowed heavily in dollars. As the greenback surges against the value of local currency revenues, it makes repaying those loans increasingly difficult.
That massive debt build-up means it is “vital” for authorities to be increasingly vigilant, especially to threats to systemically important companies and the firms they have links to, including banks and other financial firms, the IMF said.
“Emerging markets should also be prepared for the eventuality of corporate failures,” the fund said. “Where needed, insolvency regimes should be reformed to enable rapid resolution of both failed and salvageable firms.”
Besides the petroleum sector, where borrowing didn’t anticipate the nosedive in prices, the construction industry is particularly exposed to the changing business climate, the IMF said.
Worried about the building risks, investors have been selling out of many emerging markets, pushing down equity and exchange-rate prices, and pushing up borrowing costs. That market turmoil is exacerbating their economic woes.
In Latin America’s six largest economies, for example, the average growth rate has fallen from 6% in 2010 to around 1% this year. Brazil’s central bank last week said the country’s recession is far worse than expected.
To help guard against building risks, the IMF said policy makers should introduce stronger financial regulations such as higher cash buffers for exchange-rate exposures and conduct stress tests to weed out problem firms.