Most countries face ‘limited’ threat from corporate debt

The credit quality of most global sovereigns suggests limited vulnerability to corporate debt exposure despite increased borrowing in the years since the 2008 financial crisis, according to Moody’s Investors Service.

Corporate leverage has surged in the past decade as companies took advantage of affordable borrowing costs when interest rates were low.

“However, as financing conditions tighten and risk premiums widen in some markets, financial stress in the corporate sector has the potential to weigh on sovereign credit quality,” the rating agency said.

The US Federal Reserve has already embarked on monetary policy tightening and the European Central Bank is likely to do so in 2019, said Moody’s. Higher policy rates are expected to drive further increases in interest rates. The American central bank is expected to raise rates when it meets later this month on September 25 and 26.

Although this will coincide with generally robust growth in corporate revenue as macroeconomic conditions improve, some markets may see a sharp widening of risk premiums. This could trigger “abrupt capital outflows or significantly reduce capital inflows, resulting in sharp local currency depreciation”.

That said, the risk in general is limited by economic, fiscal, capital and external buffers, the report said.

Global debt has risen to more than 300 per cent since 2002 to $247 billion as of 2018, show figures from the Institute of International Finance.

Of the 41 developed and emerging markets covered in the report, corporate debt vulnerability since 2007 has increased the most in several emerging markets.

Argentina and Turkey are the most vulnerable to corporate stress, the report found. Both countries have suffered severe economic volatility in recent months, with their national currencies taking a hit and efforts to strengthen the budget and reduce debt to GDP levels so far falling short.

Significant foreign currency borrowing and increased leverage have heightened corporate debt vulnerability in Turkey, while in Argentina the “debt at risk” – which means the share of debt among listed companies where pre-tax earnings are less than double the interest expense – is inflated.

China is also exposed, said Moody’s. Corporate debt has risen sharply to above 150 per cent of GDP in the past decade, “though the government has significantly larger policy and financial buffers than Argentina or Turkey”.

Corporate debt levels are also high in “funding centres”, which refer to countries where corporate treasuries source funding for regional operations, including Belgium, Hong Kong, Ireland, Luxembourg, the Netherlands and Singapore, according to the report.

However, Moody’s said the high debt levels of funding centres overstate the risks to their economies.