Can someone answer this quick question for me please. It might come up in conversation in an interview. Say for example Mexico's peso got devalued by 40% in relation to the USD after the Trump election. How does this devaluation affect corporate borrowing from US banks or from debt issuance in USD, from say a Mexican manufacturing company whose entire cash flow and business comes from the peso? I can't tell because I can see how it would hurt borrowing since it would be hard to pay back, but all of a sudden, $1 USD can now buy so much more in Mexico, so wouldn't that make borrowing in $USD more attractive? IDK how to think about this.
thx
Bump?
I'm too lazy to go into detail, but generally speaking, if I understood your question, a decline in the value of peso means that Mexican firms who borrow in dollars are suddenly faced with higher borrowing costs.
Basic example: E.g. Company A records revenue in Pesos but has 200 in USD-denominated debt. Year 1 exchange rate is 5:1 How much revenue in Year 1 is required to pay off the debt? $1k pesos. Year 2 exchange rate is: 10:1 How much revenue is Year 2 is required to pay off the debt? 2k pesos.
With your example, what if a corporate bank, say JP Morgan can lend $100 million to a Mexican company. With the year 1 exchange rate, the Mexicans would be receiving $500 million pesos for their capital expenditure. With the year 2 exchange rate, the Mexicans would be receiving $1 billion pesos for their capital expenditure.
So I may be thinking it the wrong way, but wouldn't Mexican companies be incentivized to borrow after the devaluation because whatever the American bank can lend them, it can now be used for much more?
Are you asking how it affects companies that have already borrowed USD or companies that are planning to borrow USD? Big difference obviously.
Aliquid voluptatem aut doloremque ea repellat ea quae illo. Magnam in reiciendis enim. Nisi impedit aliquam quam dolore consequatur. Aut rem eum repellendus natus minus quo praesentium.
Ullam quas libero itaque et et. Repudiandae saepe consequatur et maiores voluptas.
Sed et dolorem aut officiis. Dolorum consequatur quis amet quia sunt repellat. Id quos provident ipsam voluptatem non. Ab doloremque distinctio non dolore provident. Aut eligendi perspiciatis molestias nemo in.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...