The credit cycle and vulnerabilities in emerging economies: the case of Latin America

Julián Caballero, Ugo Panizza, Andrew Powell, 2 April 2014



Over recent years credit growth in Latin America has been very strong, and countries have become more reliant on foreign bond issuances. These phenomena are linked, and in Caballero et al. (2014), we argue that they may have led to vulnerabilities which domestic and international supervisors are not well-equipped to assess.

Credit has grown substantially in emerging economies, and Latin America is no exception. Credit to the non-financial private sector has been growing at some 18% per annum, doubling to over $2.2 trillion in the last four years. On the one hand, this is good news. As private credit in Latin America is much lower than in advanced economies or in emerging Asia, an increase in access to finance is welcome. On the other hand, strong credit growth has frequently been associated with subsequent financial instability.

Over the last few years there has been a reversal of the trend towards more domestic financing that characterised the first decade of the new millennium. Local bond market issuance has stagnated, while the issuance of international bonds has grown substantially (Figure 1). A significant part of that issuance has been through subsidiaries of Latin American and Caribbean (LAC) firms located outside of the region.1

Figure 1. Issuance of debt securities (bonds) by corporations

Notes: The figure presents cumulative four-quarter gross issuance of bonds of resident firms and of firms that are non-resident nationals. IDS stands for International Debt Securities and DDS stands for Domestic Debt Securities as defined in Chapter 4 and Appendix D of Powell (2014).

Source: Authors’ calculations, Dealogic.

Given that emerging-market issuers do not tend to issue abroad in local currency (sometimes referred to as original sin – see Hausmann and Panizza 2010), this increase in external financing has been accompanied by a switch to more and more foreign-currency financing, particularly in dollars (Figure 2). Much external issuance has been by financial institutions, by firms in the non-traded sector, and by firms in the commodity sector.

Figure 2. Decomposition of total issuance of LAC-5 countries by currency

Notes: The figure presents the currency composition of total bond issuance in two periods: 2004Q1–2008Q3 and 2009Q1–2013Q3. LAC-5 countries include Brazil, Chile, Colombia, Mexico, and Peru. The Local category refers to issuance in domestic currency and includes inflation-indexed instruments. The LAC-5 category includes issuance in the currency of any LAC-5 country, including inflation-indexed instruments. The ROW category includes issuance in currencies from the rest of the world.

Source: Authors’ calculations, Dealogic.

An econometric analysis suggests that non-financial firms’ international bond issuance has been one driver of domestic credit growth (see Appendix D of Powell 2014). Deposits of non-financial-firms in local financial systems account for almost 60% of the increase in credit, and their external issuances account for some 16% of the growth in credit (Figure 3). This may not be a problem if firms have been able to hedge their foreign currency liabilities.

Figure 3. Explaining the growth in credit: Change in stocks of credit, deposits, and international debt in LAC-4 countries (2008–2013, $ billions)

Notes: The figure shows the change in stocks between the end of 2008 and June 2013 for credit, deposits, international debt securities (IDS) of residents, and international loans. The figure of issuance of IDS by non-resident nationals is gross issuance in the period January 2009–June 2013. LAC-4 refers to Brazil, Chile, Colombia, and Mexico.

Source: Authors’ elaboration, based on IMF, BIS Securities and Bank Locational Statistics, and Dealogic.

However, balance-sheet and liquidity dangers may lurk if firms are not hedged, or if they are conducting some type of carry trade by issuing at low rates in dollars and depositing the proceeds in the domestic financial system in local currency. Large corporate deposits tend to be the first to leave if the conditions that made them attractive change. A sudden increase in dollar interest rates may thus lead to liquidity problems for Latin American banks hosting large corporate deposits.

The increase in bank external dollar funding may also be a cause for concern. While currency mismatches on banks’ balance sheets are in general closely supervised and subject to regulation, some of this issuance has been through foreign subsidiaries where monitoring is more difficult. Moreover, while currency mismatches on banks’ balance sheets may be small, if banks are lending more in dollars then the mismatches may be with their clients, particularly in the non-traded sector.

Is a new crisis coming?

The answer is that we do not know because there is incomplete information to correctly assess the risks described above. There is no systematic information on firms’ currency mismatches and hedging activities, and none that includes those of subsidiaries that may be located in other jurisdictions. This lack of information prevents an accurate analysis of the true risks. Country authorities should work to make more information available to alleviate any concerns. The sharp shift to external dollar bond financing and the relationship between this trend and the rise in domestic credit needs further analysis and attention.


1. Of $536 billion of total issuance by LAC firms in the last five years, $116 billion has been through the subsidiaries of LAC firms located outside of the region (LAC firms refers to corporations headquartered in Brazil, Chile, Colombia, Mexico, and Peru). As noted by Shin (2013) and Turner (2014), issuance through subsidiaries by Chinese and Brazilian firms has increased in the last few years.


Caballero, Julian, Ugo Panizza, and Andrew Powell (2014), “Balance Sheets and Credit Growth”, in Andrew Powell (ed.), Global Recovery and Monetary Normalization: Escaping a Chronicle Foretold?, Latin American and Caribbean Macroeconomic Report 2014, Inter-American Development Bank, Chapter 4.

Hausmann, Ricardo and Ugo Panizza (2010), “Redemption or abstinence?”,, 21 February.

Powell, Andrew (ed.) (2014), Global Recovery and Monetary Normalization: Escaping a Chronicle Foretold?, Latin American and Caribbean Macroeconomic Report 2014, Inter-American Development Bank.

Shin, Hyun (2013), “The Second Phase of Global Liquidity and Its Impact on Emerging Economies”, speech at the Federal Reserve Bank of San Fransisco, November.

Turner, Phillip (2014), “The Global Long-Term Interest Rate, Financial Risks and Policy Choices in EMEs”, BIS Working Paper 441. 

Topics: Exchange rates, Financial markets, International finance
Tags: carry trade, credit conditions, exchange rates, Latin America, original sin

Research Economist, Research Department, Inter-American Development Bank
Ugo Panizza
Professor of international economics and Pictet Chair in Finance and Development at the Graduate Institute, Geneva.
Principal Advisor in the Research Department, Inter-American Development Bank

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