Figure 2 taken from Chung et al (2015) illustrates one example, where a non-financial firm taps the international capital markets through a bond issued by its offshore subsidiary, which then lends the proceeds to headquarters through a within-company loan. Figure 2 depicts the headquarters firm providing funding to a local bank, but the Financing could equally be provided to a non-bank Financial intermediary ñ for instance, a shadow banks that performs bank-like intermediation functions, and which operates outside the regulated banking sector. The funds brought onshore could also be used by the firm to supply credit to another firm by buying its commercial paper or other financial instruments. Irrespective of the specific form of the financial asset, the practice of bringing funds onshore will affect domestic credit conditions.

The importance of taking account of offshore issuance of bonds is illustrated in Figure 3, which plots BIS data on the amount outstanding of international debt securities of emerging market non-bank private sector borrowers. The nationality series measures the total outstanding debt securities of borrowers whose ultimate parent is an emerging market firm, while the residence series takes account only of the residence of the borrowing entity. Thus, the bonds issued by the financial subsidiary of an emerging market firm registered in the Cayman Islands are included in the nationality series, but not in the residence series. The nationality series is almost twice the size of the residence series, indicating that our procedure of consolidating the borrowing at the ultimate parent level provides a more accurate picture of the activities (and hence the exposures) of emerging market borrowers.

In our firm-level investigation of the determinants of US dollar bond issuance, we find that emerging market corporates tend to borrow more in US dollars when they already hold large cash balances, suggesting that cash needs for investment or other expenditure may not be the only motivation for bond issuance. When we examine the timing of the dollar bond issuance by EME corporates, we find that it is more prevalent during periods when the dollar carry trade is more favorable in terms of an appreciating local currency, high interest rate differential vis-‡-vis the dollar, and when the exchange rate volatility is low. With regard to how the proceeds of the dollar bond issuance are used, we examine the consequences of bond issuance for corporate cash holdings, and find that the proceeds of bond issuance is more likely to end up being held in cash compared with other sources of financing for the firm, such as through operations or the sale of assets. Moreover, the greater tendency of the bond issuance to end up adding to cash holdings is more pronounced for USD-denominated bond issuance.

Eoin Treacy's view

Emerging market currencies have been falling for quite some time already and the rebound of the Dollar has exacerbated the decline as US Dollar loans have been pressured. The question at this juncture is to what extent these points are already in the price.

The Asia Dollar Index and Latin America Dollar Index remain very weak but there are tentative signs of an easing in Dollar predominance. For example the Colombia Peso, which had halved in value in the last year, has found at least near-term support in the region of COP3200. Potential for steadying which would allow the oversold condition relative to the 200-day MA to be unwound is now looking more likely as a result of the loss of consistency in the Peso’s downtrend.