نوسانات نرخ ارز و عملکرد اقتصادی در پرو: تجزیه و تحلیل سطح شرکت

This paper analyzes the impact of the exchange rate volatility on the performance of the Peruvian economy using financial information from 163 non-financial listed firms. We find evidence that, for firms holding dollar-denominated debt, investment decisions are negatively affected by real exchange rate depreciation. The reasons behind this result are: (i) the high degree of liability dollarization and currency mismatch that create the conditions for a balance sheet effect and a financial stress in the aftermath of a currency depreciation; (ii) the strong bank-lending channel that follows and reinforces the balance sheet effect; (iii) the domestic demand shrinkage that affects severely firms’ sales; and (iv) the relatively small and poorly diversified export sector.

Which is the impact of exchange rate volatility on the economic activity? This seems to be one of the most compelling questions in the economic literature in recent times. In the last decade, several countries experienced large exchange rate depreciations with different results. In some cases, such as Mexico in 1994 and Thailand in 1997, currency depreciations were followed by a large contraction in economic activity and the collapse of the financial sector. The most striking characteristics of these currency crises were that, previous to the crises themselves, the degree of exchange rate misalignment was considered small, and the macroeconomic fundamentals were considered sound in terms of low inflation, strong fiscal situation and prudent monetary stance, among other variables. On the contrary, in some other cases such as South Africa in 1998, after the currency depreciation economic conditions improved as output growth was restored. What is driving these different results? Currency depreciation affects the real side of the economy through different channels. First, a real depreciation can have expansionary effects through increasing the operating profits in the export sector, as well as increasing the cost of the imported goods favoring tradable activities in the economy. The strength of this ‘competitiveness’ effect depends heavily on the price elasticity of the export sector as well as on the price elasticity of the imports. In particular, when a large fraction of imports are highly inelastic to changes in the relative price, as is the case with imported inputs and capital goods, the higher cost of inputs and capital goods could offset the positive effects in the export/tradable sector, having an overall contractionary effect in aggregate output as well as in investment. The evidence of the existence of this channel is mixed. On one side Ghei and Prittchett (1999) and Duttagupta and Spilimbergo (2000) provide evidence of how exports increase after a currency depreciation. On the other side Agénor and Montiel (1996) and Reif (2001) show the contractionary effects of a real exchange rate depreciation due to the cost-of-input mechanism. A second main channel emerges when there exists a significant currency mismatch in the economy. A currency mismatch means that a large fraction of firm's debt is dollar denominated while the flow of income as well as assets are mostly denominated in domestic currency. In such economy, a large real depreciation deteriorates the firm's net worth. As the firm's risk increases, credit becomes more expensive and more restricted, which finally affects investment and therefore, aggregate demand. As a result, through this ‘balance-sheet effect’, currency depreciations have contractionary effects in the economy. To understand this channel, on the theoretical side, a large body of literature is being developed around what is known as the ‘open economy Bernanke–Gertler’ framework (a phrase coined by Krugman), which refers to the inclusion of some sort of imperfection in the domestic financial market within a standard model of open economy, along the lines of the Mundell–Fleming workhorse. Krugman (1999) and Aghion et al. (2001) present models that have as a common feature the existence of multiple equilibria. This feature is needed to explain the fact that most Asian countries experienced large currency depreciations without ex-ante significant changes in macroeconomic fundamentals. Whether or not the competitiveness effect offsets the balance sheet effect is an empirical question that needs to be answered using firm-level data. So far, the evidence is not conclusive. Most notably, Bleakley and Cowan (2002), analyzing a sample of firms in five Latin-American countries during a period of 1990–1999, found evidence that firms holding dollar-denominated debt during a exchange rate realignment consistently increased their capital expenditures. This finding is at odds with the predictions of the theory, given the deterioration of firms’ net worth. In their view, this result provides evidence that the competitiveness effect dominates the balance-sheet effect. However, Aguiar (2002) uses a sample of Mexican firms finding that after the 1994 Mexican peso crisis, there was a contraction on investment driven by the weak balance sheet position of the firms. Following different approaches, Forbes (2002) examines how 12 large depreciation events that took place in different countries during the period 1997–2000 affected firms’ performance. Interestingly enough, it is found that firms with higher indebtedness tend to have lower growth in their net income, but firms with a higher share of foreign sales tend to have a better performance after the depreciations. Also, Harvey and Roper (1999), analyzing the magnitude of the Asian crisis, found that the major factor contributing to the collapse of the economy was the growing indebtedness of Asian companies in dollar-denominated debt. Given that this empirical issue has not been solved yet, the objective of this study is to find an answer to the question posed at the very beginning of the paper for the case of Peru. In order to do this, we use financial information from 163 non-financial listed firms finding evidence that for firms holding larger dollar-denominated debt, investment decisions are negatively affected by a real exchange rate depreciation. This result is explained by the high degree of firms’ liability dollarization and currency mismatch, which created the conditions for a balance sheet effect and a financial stress in the aftermath of a currency depreciation. This result is important for policy design, specially in terms of monetary policy where the trade-off between higher interest rate volatility or exchange rate volatility is always present. Also, there are important implications for prudential regulations and policies oriented to develop capital markets since the contraction in the real sector could also have a negative impact in the financial sector. This relationship among real exchange rate depreciation, macroeconomic activity and financial fragility for the Peruvian economy has been analyzed in Carranza et al. (2003) using aggregate data. The Peruvian case is particularly interesting because Peru did not experience such a traumatic depreciation as the ones experienced by Asian or other Latin-American countries. On the contrary and by most standards, a real depreciation of almost 20% in a 1-year period (March 1998–March 1999) can be considered normal or even small. However, such a small depreciation had strong negative effects on internal demand, as aggregate investment and private consumption plummeted. The small depreciation also caused financial stress in the economy as non-performing loans drastically increased, threatening the stability of the financial system, and deepening and spreading the negative effects of real exchange rate depreciation throughout the economy. Finally, the economy remained in recession for a long period of time and, by the end of 2002, private investment had not yet recovered its previous level, hovering approximately 2/3 of the level reached at the end of 1997. The rest of the paper is structured as follows. Section 2 discusses the recent economic developments in the Peruvian economy. In Section 3, the firm-level data are presented. Section 4 is devoted to discuss the estimation strategy and the econometric results are presented in the Section 5. Finally, the conclusions and some policy recommendations are presented in Section 6 of the paper.

In this paper we find evidence that currency depreciation negatively affected the firms’ investing behavior in the Peruvian economy between the years 1994 and 2001. In particular, we find evidence of a negative balance sheet effect that arise from three channels: (i) the interaction effect of dollar denominated debt times the real exchange rate depreciation; (ii) the fact that firms with higher dollar debt ratios tend to invest less; and (iii) the effect of the real exchange rate depreciation by itself. However, we find no evidence of a significant ‘competitiveness effect’, as both the exports and tradability seem to play no role in the investment behavior. Finally, we find support for a bank-lending channel hypothesis that underpins the balance sheet effect, given the following results: (i) the positive effect of total leverage ratio; (ii) the Diamond-like signaling element of short term debt ratio; and (iii) the fact that firms’ investing behavior is closely related to cash flow projections. Our findings contradict the results of Bleakley and Cowan (2002) as they found that the balance sheet effect is positive. They argue that firms with higher participation in the tradable sector are more likely to hold debt denominated in foreign currency. On the contrary, the high degree of liability dollarization and currency mismatch observed in the Peruvian economy would have created the conditions for the existence of a negative balance sheet effect and the financial stress that took place in the aftermath of the currency depreciation episodes of the late 1990s. If we take into account the financial constraints that reinforce the balance sheet effect, we can understand the economic forces behind our findings. What are the main lessons of this exercise from the policymaking point of view? As precautionary measures, the government should pursue structural reforms seeking to increase the degree of openness of the real sector, which effectively reduces the currency mismatch at the macroeconomic level. At the same time, market-friendly strategy aiming at the dedollarization of the economy should be followed. This strategy should be based on fostering internal savings in domestic currency (i.e. issuing inflation-indexed government bonds as a saving instrument) and on pricing in the negative externality of foreign currency indebtedness (i.e. increasing general banks’ provisions for loans in foreign currency to non-export firms). What should be done in the aftermath of a crisis? It is clear that monetary policy should be as prudent as possible, taking into account that a period of banking illiquidity should be faced by the central bank. The central bank should be prompt to avoid severe banking liquidity droughts via flexible dollar reserve requirements. However, domestic interest rates can go as high as needed to fight speculative attacks against the currency without any significant impact on the real sector, as long as the short-term debt in domestic currency is rather small. Regarding fiscal policy, it can be countercyclical if public sector financial needs can be healthy funded, otherwise it could be another source of instability through deterioration of credibility and higher country-risk perception.