Firm-to-firm financial linkages and dollar risk transmission

Dollar risk can spread through domestic supply chains because large firms use foreign-currency borrowing to finance trade credit, exposing firms that have no dollar debt.

• In the sample, accounts payable represent about 22% of total liabilities and 32% of short-term liabilities, while accounts receivable represent approximately 17% of assets and 36% of short-term assets.
• Average foreign-exchange debt equals about 22% of total debt, but exceeds 88% for firms in the top decile; large firms also borrow more cheaply in foreign currency than in local currency.
• For every dollar of additional FX debt, about 57 cents fund short-term assets, including 13 cents for cash, 14 cents for inventories and 15 cents for accounts receivable.
• For a highly FX-exposed non-exporter, a 10% depreciation reduces quarterly profits by about 0.4 percentage points of assets, roughly twice its average quarterly profit margin, while accounts receivable fall by only 0.14 percentage points.
• Depreciations, unlike appreciations, cause exposed non-exporters to reduce trade credit and build cash buffers; exporters experience a much smaller profit effect and no statistically significant cash or trade-credit response.

Takeaway: Investors should assess currency exposure through supplier financing, working-capital balances and the resilience of trade-credit providers, not only through a company’s reported FX debt; financially strong suppliers may absorb shocks, while constrained ones can pass them downstream.