Overseas corporate debt poses currency risk

The treatment of external corporate debt as FDI may result in misinterpretation of balance of payments of emerging market economies, thereby understating the currency risk. The current convention is to treat overseas debt raised by companies and its repatriation into various instruments in domestic markets as FDI.

The Bank for International Settlements (BIS) believes this should be treated as foreign portfolio investments or hot money since it can be withdrawn at short notice. These loans are issued through offshore entities. Therefore, it may be viewed as foreign portfolio investments rather than FDI.


According to the BIS, between 2009 and 2013, emerging market non-bank private corporations issued $554 billion of international debt securities, of which nearly half was issued by their offshore affiliates. These loans may be used for three purposes – repatriation to domestic company, loan to unrelated company as trade credit and cross-border deposits.

Based on BIS findings, the non-banking external financing stands at 17% of cumulative net flows to EMs. “We interpret those findings as evidence that the offshore subsidiaries of EME (emerging market economies) non-financial corporates are acting as surrogate intermediaries,” says Stefan Avdjiev, deputy head of International Banking and Financial Statistics at BIS.