metadata: authors: 0: author: Claessens,Constantijn A.
1: author: Djankov, Simeon
2: author: Lang, L
count: East Asia and Pacific
docna: 0: docna: Corporate growth, financing, and risks in
            the decade before East Asia's financial crisis
docty: Policy Research Working Paper
subtopic: Economic Conditions and Volatility,Inflation,Finance and Development,Global Environment,Financial Sector Policy
teratopic: Finance and Financial Sector Development
abstracts: cdata!: East Asia's financial crisis has
            been attributed in part to the weak performance and risky
            financial structures of Asian corporations. In the period
            before Asia's financial crisis, however, analysts were
            not suggesting that the financial structure of many East
            Asian corporations would be unable to withstand the combined
            shocks of increased interest rates, depreciated currencies,
            and large drops in domestic demand. To document the basic
            record of corporate performance and financing structures for
            East Asian corporations, the authors analyze data for 5,550
            firms in nine countries for the period 1988-96. They find
            large differences in performance and financial structure
            across countries. Profitability - as measured by real return
            on assets (ROA) in local currency -- was relatively low in
            Hong Kong, Japan, the Republic of Korea, and Singapore in
            the decade before the crisis. Corporations in Indonesia, the
            Philippines, and Thailand averaged high returns - roughly
            double those in Germany and the United States for the same
            period. In 1994-96, measured performance declined somewhat
            in several East Asian countries, especially Japan and Korea.
            Those differences in performance were not fully reflected in
            sales growth, as investment rates were high and continued to
            drive output growth in all countries. These stylized facts
            suggest that the East Asian miracle was indeed based on a
            vibrant corporate sector. But the combination of high
            investment and relatively low profitability in some
            countries meant that much external financing was needed.
            Outside equity was used sparingly - in part because stock
            markets were depressed (Japan) or because insiders preferred
            to retain control - so borrowing was heavy in most East
            Asian countries, and leverage increased in the years before
            1996 in Korea, Malaysia, and Thailand. Risk increased as
            short-term (foreign exchange) borrowing became increasingly
            important in the 1990s, especially in Malaysia, Taiwan
            (China), and Thailand. In other words, it is now apparent
            that some of the vulnerabilities in corporate financial
            structures that were to become an important factor in East
            Asia's financial crisis already existed in the early
            1990s, although they were not noted at the time.
repnme: repnme: Corporate growth, financing, and risks in
            the decade before East Asia's financial crisis
display_title: Corporate growth, financing, and
            risks in the decade before East Asia's financial crisis
listing_relative_url: /research/1998/11/441282/corporate-growth-financing-risks-decade-before-east-asias-financial-crisis
topicv3: Macroeconomic Vulnerability and Debt
            m1326057 1104,Inflation m1326709 0870F4727ACED1CF8525815C00471347,Banking Institutions m1326724 1234,Environment, Natural Resources and Blue
            Economy m1327391 566,Financial Sector Development m1327681 1920
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Finance and Financial Sector Development
origu: Financial Sector Practice (FSP)
no_of_pages: 27
model_extractions: POLICY RESEARCH WORKING PAPER 2017

# Summary findings

East Asia's financial crisis has been attributed in part to the weak performance and risky financial structures of Asian corporations. In the period before Asia's financial crisis, however, analysts were not suggesting that the financial structures of many East Asian corporations would be unable to withstand the combined shocks of increased interest rates, depreciated currencies, and large drops in domestic demand.

To document the basic record of corporate performance and financing structures for East Asian corporations, Claessens, Djankov, and Lang analyze data for _5,550_ firms in nine countries for the period 1988-96. They find large differences in performance and financial structure across countries.

- Profitability as measured by real return on assets - (ROA) in local currency was relatively low in Hong Kong, Japan, the Republic of Korea, and Singapore in the decade before the crisis. Corporations in Indonesia, the Philippines, and Thailand averaged high returns - roughly double those in Germany and the United States for the same period.

In 1994-96, measured performance declined somewhat in several East Asian countries, especially Japan and Korea. Those differences in performance were not fully reflected in sales growth, as investment rates were high and continued to drive output growth in all countries.

These stylized facts suggest that the East Asian miracle was indeed based on a vibrant corporate sector.

But the combination of high investment and relatively low profitability in some countries meant that much external financing was needed. Outside equity was used sparingly -in part because stock markets were depressed (Japan) or because insiders preferred to retain control - so borrowing was heavy in most East Asian countries, and leverage increased in the years before 1996 in Korea, Malaysia, and Thailand.

Risk increased as short-term (foreign exchange) borrowing became increasingly important in the 1990s, especially in Malaysia, Taiwan (China), and Thailand.

In other words, it is now apparent that some of the vulnerabilities in corporate financial structures that were to become an important factor in East Asia's financial crisis already existed in the early 1990s, although they were not noted at the time.

- - This paper a product of the Economic Policy Unit, Finance, Private Sector, and Infrastructure Network is part of a larger effort in the network to study the performance and financing structures of East Asian corporations. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Rose Vo, room MC10-628, telephone 202-473-3722, fax 202-522-2031, Internet address hvol@worldbank.org. Simeon Djankov may be contacted at sdjankov@worldbank.org. November 1998. (23 pages)

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An ohjective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent._ Produced by the Policy Research Dissemination Center
# **East Asian Corporates: Growth, Financing and Risks over the Last Decade**

by Stijn Claessens, Simeon Djankov and Larry Lang World Bank The opinions expressed do not necessarily reflect those of the World Bank. We thank Jack Glen, Ejaz Ghani, Guy Pfeffermann, S. Ramachandran, and Charles Woodruff for helpful suggestions. For comments, contact Simeon Djankov, E-mail: SDjankov~worldbank.org, Tel. (202) 4734748, fax (202) 522-2031.
**1. Introduction**

The East Asian financial crisis has in part been attributed to the weak performance and risky financial structures of corporates. Ex-post, it has become clear that the operational performance of East Asian corporates was indeed not as stellar as many had thought and in fact involved investment with high risks. Also ex-post, it has become apparent that the financial structures of many East Asian corporates could not withstand the combined shocks of increased interest rates, depreciated currencies, and large drops in domestic demand. This poor performance and risky financing structures of East Asian corporates were, however, not notably featured among observers writing on East Asia prior to the financial crisis. Quite the opposite, East Asian corporates were considered an important contributing part of the East Asian miracle and were generally viewed upon as very competitive and adept at exploiting new market opportunities, and consequently attracted considerable amounts of (foreign) capital.

Reconciling the differences between these ex-post and ex-ante view will likely be a topic of much future research.' In this note, we are less ambitious and start with documenting the basic record in corporate perfornance and financing structures for East Asian corporates over the last decade. Analyzing whether this record led or contributed to a financial crisis will be pursued in future work. We use a database of balance sheet and income statement data for 5550 East Asian firms in nine countries over the period 1988-1996 for establishing the stylized facts on corporate performance and financing structures. The main data source are annual reports of the companies listed on the major stock exchanges in the region.

We find large differences in performance and financial structures across countries. Profitability, as measured by real return on assets (ROA) in local currency, was relatively low in Hong Kong, Japan, Korea, and Singapore throughout the period, while corporates in Indonesia, the Philippines, and Thailand had high returns, on average twice higher than those recorded in Germany and the United States over the same period. In the years 1994-1996, measured performance declined somewhat in several East Asian countries, especially Japan and Korea. These differences in performance did not show up as much in sales growth as investment rates were high and continued to drive output growth rates in all countries. These stylized facts suggest that the East Asian miracle was indeed based on a vibrant corporate sector.

However, the combination of high investment and relatively low profitability in some countries meant that much external financing was needed. As outside equity was used sparingly, partly as stock markets were depressed (Japan) or because insiders preferred to retain control, leverage was high in most East Asian countries, and increasing in Korea, Malaysia and Thailand. This created large risks as short-term (foreign exchange) borrowing became increasingly important in the last few years, especially in Malaysia, Taiwan, and Thailand. Some of the vulnerabilities in corporate financial structures that have now become a very apparent factor in Two companion papers use the same data to study specific aspects of the behavior of corporations in East Asia. Claessens et al. (1998a) investigates the patter of diversification into vertically related, complementary related, and unrelated businesses. Claessens et al. (1998b) examines the link between ownership structure and corporate performance.

2
triggering and aggravating East Asia's financial crisis, were thus already in existence in the early 1990s.

# **2. Data**

The data come from annual reports of the companies listed on the major stock exchanges in the region and come from Worldscope and Extel databases. The datasets are unbalanced, i.e., the number of observations varies from year to year. We have excluded companies, which report data less than three times over the period 1988-96. We have also excluded financial and banking institutions (SIC6000-6999). Finally, in any given year, we exclude companies which do not include all of the following variables - net sales, net income after taxes, cost of goods sold, total assets, and the value of common equity. The data set consists of 588 companies in Hong Kong, 317 companies in Indonesia, 2526 companies in Japan, 392 companies in Korea, 772 companies in Malaysia, 170 companies in Philippines, 348 companies in Singapore, 265 companies in Taiwan, and 564 companies in Thailand.

Several caveats apply to the data. First, the statistics we report do not attempt to correct for cross-country differences in industrial structure. If a country data set has many utility firms, for example, average leverage might be higher and profitability lower. A forthcoming companion paper breaks down the sample into sectors (based on two-digit SIC codes) to provide a more accurate comparison of company performance across countries. The data also cover mainly large firms-the median size of the _5550_ firms is 4273 employees, with the largest company employing more than 150,000 employees. This selection pattern arises since firms have to be listed on a stock exchange in order to enter the database, and listed companies tend to be large. The bias towards larger companies may be problematic if one were studying the effect of the Asian financial crises on the corporate sector. It does not pose a problem here, since we focus on the years preceding the crisis, when (as critics argue) large companies were at the root of the corporate and financial sector difficulties.

Whenever possible, we have compared the main variables of interest with those reported in other studies, in particular Demirguc-Kunt and Maksimovic (1995), Glen et al. (1998), and Goldman Sachs (1998).2 We also cross-checked the data for Japan with the _Comparative Economic and Financial Statistic for Japan and other Major Countries,_ published by the Bank of Japan and the OECD Financial Statistics Part 3, _Financial Statements of Non-Financial Enterprises._ The similarity in calculations-large companies are also used there-provides some comfort in the robustness of our results.

> **2** Pomerleano (1998) also analyzes East Asian corporations. He uses alternative measures of performance and leverage that are not easily comparable with the statistics in this study.

3
# **3. Performance Measures**

As our first measure of performance we use the real rate of return on assets (ROA) in local currency. This is calculated at the firm level as the earnings before interest and taxes (EBIT) in local currency over total assets minus the annual inflation rate in the country. The advantage of this measure is that it is not influenced by the liability structure of the corporate, as it excludes interest payments, financial income, and other income or expenses. Table 1 shows that across countries, East Asian corporates have had quite different ROAs. Relatively low profitability rates have been recorded by corporates from Hong Kong, Japan, Korea, and Singapore with real ROAs on average of about 5%. High-profitability countries, at least for most of the period we study, have been Indonesia, the Philippines, and Thailand. Corporates in these countries averaged real ROAs of about 9%-10% for the whole period. ROAs for corporates in Malaysia and Taiwan fall in between these two groups, but their returns of about 7% are still closer to the high performers. These ROAs can be compared to ROAs in Germnany and the United States<sup>3</sup> of about 5 percent, providing support to the notion that the corporate sector contributed significantly to the East Asian Miracle during most of this period.

**Table 1: Return on Assets for Nine Asian Countries, Germany and the US**

|||(|%, med|ians, in|real loc|al curre|ncy)||||
|---|---|---|---|---|---|---|---|---|---|---|
|Country|1988|1989|1990|1991|1992|1993|1994|1995|1996|1988-96|
|Hong Kong|5.1|5.3|4.9|4.8|4.5|3.8|3.9|3.9|4.1|4.6|
|Indonesia|n.a.|n.a.|9.4|9.1|8.6|7.9|7.4|6.2|6.5|7.1|
|Japan|5.7|5.4|4.6|4.7|4.8|4.5|4.1|3.8|3.6|4.1|
|Korea|4.4|3.9|4.1|4.0|3.9|3.6|3.4|3.6|3.1|3.7|
|Malaysia|5.4|5.6|5.4|6.2|6.0|6.5|6.3|6.1|5.6|6.3|
|Philippines|n.a.|n.a.|n.a.|7.1|6.4|8.1|8.5|6.8|8.4|7.9|
|Singapore|4.9|_4.5_|4.2|3.9|5.2|4.6|4.5|3.9|4.0|4.4|
|Taiwan|n.a.|n.a.|n.a.|5.1|6.2|6.5|6.8|6.5|6.6|6.7|
|Thailand|10.8|11.0|11.7|11.2|10.2|9.8|9.3|7.8|7.4|9.8|
|uS|4.7|4.8|5.1|4.9|5.2|5.4|5.3|5.2|5.2|5.3|
|Gernany|5.3|_5.5_|_5.5_|5.7|5.6|5.2|5.1|4.9|_5.0_|_4.7_|

Note: Table Al reports means, standard deviations, and sample sizes.

As a further comparison of the performance of East Asian corporates, we plot the average 1988-96 ROA for corporates in all other countries that report to Worldscope (Figure 1). Thailand, the Philippines, and Indonesia have the highest ROAs in this sample of 46 countries, while Taiwan and Malaysia are close behind. At the other end, Korea and Japan have the lowest ROAs in the sample, together with Norway, Sweden, and Austria. Singapore and Hong Kong also have relatively low ROAs in real local currency.

> 3 For all companies listed on the DAX in Frankfurt, and for all NYSE companies in the US.

4
Figure 1: International Comparison on ROAs <!-- Start of picture text --> Austria<br>Sweden<br>Korea<br>Japan<br>Norway<br>Pakistan<br>Italy<br>Brazil<br>Colombia<br>Singapore<br>Switzeriand<br>Portugal<br>Hong Kong<br>Canada<br>Ireland<br>Hungary<br>Germany<br>Denmark<br>Belgium<br>United Kingdom<br>Sri Lanka<br>Mexico<br>t Argentina<br>o United States<br>Spain<br>Luxembourg<br>France<br>Peru<br>Netherlands<br>Israel<br>China<br>Turkey<br>Finland<br>South Africa<br>Venezuela<br>New Zealand<br>Australia ..<br>Greece . .<br>Malaysia<br>India<br>Taiwan<br>Poland<br>Chil<br>Indonsia'<br>The Philippines<br>Thailand -<br>3 4 5 6 7 8 9 10<br>ROA<br><!-- End of picture text --> _5_
Next we calculate the return on assets in US dollars, adjusted for the effects of currency movements (Table 2). This measure of performance presents the point of view of an international investor who can allocate resources across several countries. With the exception of Japan (6.6%) and Taiwan (8.4%), all East Asian countries have US dollars ROAs higher than the US median (8.7%). The Philippines (18.7%), Thailand (14.7%), and Indonesia (13.0%) have the highest average returns over the 1988-96 period.

**Table 2: Return on Assets for Nine Asian Countries, Germany and the US**

|||(<br>|%,medi<br>|ans, in<br>|nomina<br>|l US do<br>|llars)i<br>||||
|---|---|---|---|---|---|---|---|---|---|---|
|Country|1988|1989|1990|1991-|1992|1993j|1994j|1995|1996|1988-96|
|Hong Kong|_~~~<br>8.0|=<br>8.4|<br>7.2|_,.__<br>12.9|__<br>14.3|12.5|_I1_15|8.0|10.3|10.3|
|Indonesia|n.a.|n.a.|16.0|13.7|12.6|15.3|11.7|10.7|11.2|13.0|
|Japan|6.5|-6.0|13.3|14.8|7.0|16.2|15.6|1.0|-9.2|6.6|
|Korea|25.1|10.3|7.3|7.2|6.4|5.9|12.1|9.9|-1.0|9.2|
|Malaysia|-0.8|8.8|7.2|9.9|14.8|6.1|_15.5_|12.2|_9.5_|9.2|
|Philippines|n.a.|n.a.|n.a.|23.2|21.2|5.4|29.4|7.5|16.5|17.2|
|Singapore|8.9|9.4|_15.6_|13.6|6.9|9.3|16.4|9.0|6.8|10.7|
|Taiwan|n.a.|n.a|n.a|6.2|12.0|4.6|12.4|6.3|8.9|8.4|
|Thailand|13.9|14.6|19.3|16.9|13.4|13.1|16.6|13.2|11.5|14.7|
|US|8.7|9.6|10.5|9.1|8.3|84|7.9|8.0|8.1|8.7|

The high returns in Table 2 are driven to some extent by the real exchange rate appreciation in the respective countries. Correcting for the real exchange rate appreciation vis-?avis the US dollar, we find significantly lower ROAs. For example, the return in US dollars once a correction is made for real currency appreciation is 8.4% in Korea in 1988. Mathematically, this is nothing else than the sum of the real ROA in Korean won (4.4%) and the inflation rate in the United States (<sup>4</sup> .0%)-all other terms cancel out in the calculation. This implies that the relative comparisons of the ROAs corrected for real exchange rate appreciations are the same as those in Table 1.

Our third measure of profitability is operational margin, calculated as the difference between sales and costs of good sold, as a share of sales (Table 3). The liability structure or other income and expenses of the corporate do not influence this measure either, but the capital intensity of the individual corporate does. The operational margin measure shows less crosscountry differences and has been stable for most countries throughout the period. The crosscountry differences may indicate that firms across East Asia were exposed to differing degree of (international) competition. Relatively lower-margin producers? seem to be Singapore, followed by Hong Kong, Malaysia and Korea. Surprisingly, Japanese firms have higher-margins on goods sold ratios than these developing countries, which may reflect the high capital intensity of Japanese firms and the, often-argued, lower level of competition within Japan. Relatively highmargin producers are the Philippines,;Indonesia and Thailand, which may reflect the degree of domestic competition, the lower wages and high share of natural resources in their exports (the later especially for Indonesia). No strong trend appears- over time, albeit there is some decrease 6
in operational margins for Hong Kong, Indonesia and Singapore, possibly reflecting their higher wage growth while at the same time they were facing increased competition.

**Table 3: Operational Margin for Nine Asian Countries, US and Germany**

|||||(%,<br>|medians<br>|)|||||
|---|---|---|---|---|---|---|---|---|---|---|
|Country|1988|1989|1990|1991|1992|1993|1 1994|1995|1 1996|1988-96|
|Hong Kong|23.5|19.5|22.2|19.6|17.4|16.6|17.3|14.6|14.2|18.7|
|Indonesia|n.a.|n.a.|n.a.|35.7|33.3|34.4|32.8|31.2|30.6|32.9|
|Japan|22.2|22.7|22.9|22.4|21.9|21.8|21.8|23.1|23.3|22.1|
|Korea|13.7|16.8|17.3|16.9|19.2|18.7|19.6|21.4|22.1|19.6|
|Malaysia|16.4|16.3|17.1|17.3|17.6|17.4|18.4|19.5|25.5|18.1|
|Philippines|n.a.|n.a.|n.a.|36.1|26.4|26.4|27.5|30.8|33.3|27.7|
|_Singapore_|17.3|16.7|16.8|_15.5_|_15.5_|15.2|14.1|13.6|13.1|14.9|
|Taiwan|n.a.|n.a.|n.a.|25.4|21.4|22.7|22.6|22.3|21.9|22.6|
|Thailand|21.9|24.3|25.7|27.3|25.9|25.1|24.9|24.7|22.7|25.2|
|US|14.1|13.9|14.1|14.3|15.5|14.0|14.7|14.8|14.6|14.4|
|Gennany|13.2|13.4|13.7|13.5|13.8|14.1|15.6|16.7|17.1|14.6|

Note: Table A2 reports means, standard deviations, and sample sizes.

The cross-country differences in returns on assets do not reflect themselves directly in differences in sales growth, which are also more variable over time (Table 4). Most East Asian corporates recorded on average high, real sales growth over the period. Malaysia, Indonesia and Thailand stand out, with 11.9%, 10.6% and 9.7% on average, followed by Taiwan with 9.3%. Other countries also had high sales growth rates, which are about double those of Germany (2.6%) and the US (3.7%). The country with the lowest corporate sales growth in East Asia is Japan, averaging 7.7%. These high sales growth rates mirror the high growth in export and domestic demand that has characterized this region over the last decade. We do observe some slowdown, however, in 1996 in sales growth for Indonesia, Japan, Singapore, Taiwan, and Thailand, possibly reflecting lower exports growth rates.

**Table 4: Real Sales Growth (Year-on-Year) for Nine Asian Countries, Germany and the United States**

||||<br>|(%, me<br>|dians)<br>|||||
|---|---|---|---|---|---|---|---|---|---|
|Country|1989|J1990|1991|[1992|1993|]1994|1995|[1996|11988-96|
|Hong Kong|10.1|11.6|10.2|12.4|9.8|9.4|9.7|11.8|9.2|
|Indonesia|n.a.|n.a.|n.a.|10.7|12.1|12.4|9.4|8.3|10.6|
|Japan|7.4|8.2|8.4|8.3|8.8|8.5|7.2|4.3|7.7|
|Korea|8.4|8.7|8.2|8.3|7.6|7.3|7.2|8.6|8.2|
|Malaysia|9.7|12.3|11.8|12.7|13.1|12.6|11.7|11.9|11.9|
|Philippines|n.a.|n.a.|n.a.|8.4|6.7|7.6|10.6|12.2|8.2|
|Singapore|8.4|8.6|8.1|9.4|11.6|11.8|10.2|7.7|8.7|
|Taiwan|n.a.|n.a.|n.a.|7.1|11.3|10.3|9.7|8.4|9.3|
|Thailand|11.6|10.3|10.8|9.6|8.3|10.1|10.7|5.7|9.7|
|US|4.3|3.4|-1.8|4.3|2.8|6.9|4.1|4.3|3.7|
|Germany|5.0|4.4|_5.1_|1.1|-4.2|2.3|1.3|4.7|2.6|

Note: Table A3 reports means, standard deviations, and sample sizes.

7
That these sales growth rates were maintained at such a high level-and at rates very similar across countries-reflects in part the high investment rates in this region (Table _5)._ We measure investment growth as new dollar investments as a share of existing fixed assets. Over this period, Indonesia, Korea, and Thailand stand out, with investment rates of up to 13%, and in some years even or more, followed by Malaysia, the Philippines, and Singapore, with rates averaging about 10%. Hong Kong, Japan and Taiwan had growth in investment in fixed assets of about 8. Japan has had low investment rates especially since 1990. This probably reflects in part its sustained financial and corporate crisis since the early 1990s.

**Table 5: Capital Investment for Nine East Asian Countries, Germany, and the United States, 1988-1996**

|||||<br>(%|<br>,<br>median|<br>s)|||||
|---|---|---|---|---|---|---|---|---|---|---|
|Country|1988|1989|1 990|<br>1991|<br>1 992|1 993|1994|<br>1995|1996|11988-96|
|Hong Kong|14.3|16.6|8.3|7.6|7.2|19.8|7.6|5.8|9.3|8.3|
|Indonesia|n.a.|n.a.|n.a.|12.4|13.4|8.6|15.8|13.8|11.8|12.7|
|Japan|11.6|14.2|8.3|4.6|7.6|6.8|7.3|7.5|7.1|8.0|
|Korea|15.6|13.8|13.2|19.6|11.6|11.2|12.2|12.4|13.7|13.6|
|Malaysia|8.6|7.6|8.9|9.6|11.3|13.4|15.2|14.6|16.1|10.7|
|Philippines|n.a.|n.a.|n.a.|9.1|8.9|7.8|13.5|14.1|14.5|10.8|
|Singapore|7.8|7.6|7.4|8.8|9.6|11.3|13.4|12.5|13.5|10.4|
|<br>Taiwan|n.a.|n.a.|n.a.|14.3|8.2|8.4|8.7|11.2|8.6|8.7|
|Thailand|10.4|12.9|12.3|15.0|14.9|15.0|14.7|14.5|5.8|13.8|
|US|3.8|4.1|3.0|-1.4|4.0|2.6|6.4|3.7|3.8|3.4|
|Germany|1 4.9|4.8|4.2|_5.0_|0.9|-3.8|2.1|1.3|4.6|2.5|

Note: Table A4 reports means, standard deviations, and sample sizes.

# **4. Financial structures**

The degree of riskiness inherent in the liability structures of East Asian corporates is evident in the data. The high investment rates, and relatively low ROAs for some countries, meant that external financing had to be large as internal sources of capital, i.e., retained earnings, were limited. This high external financing, mostly from the banking systems, has been always a characteristic of the East Asian Miracle. Leverage, defined as total debt over equity, remained then also high for many East Asian countries, much above that in other developing countries and many developed countries (Table 6). The highest leverage over this period was in case of Korea, about five times the lowest, Taiwan. Malaysia and Singapore were also low; leverage in the Philippines, while rising, was still much below that of Indonesia and Thailand.

8
||<br>|**Table 6**|**: Lever**<br>**Ge**|**age for**<br>**rmany**<br>(|**Nine A**<br>**and th**<br>%,<br>means|**sian C**<br>**e US**<br>)<br>|**ountrie**<br>|**s,**<br>|||
|---|---|---|---|---|---|---|---|---|---|---|
|Country|J1988|1989|1990|1991|1992|1993|1994|1 1995|J1996|1T1988-96|
|Hong Kong|1.832|2.311|1.783|2.047|1.835|1.758|2.273|1.980|1.559|<br>1.902|
|Indonesia|n.a.|n.a.|n.a.|1.943|2.097|2.054|1.661|2.115|1.878|<br>1.951|
|Japan|2.994|2.843|2.871|2.029|2.042|2.057|2.193|2.367|2.374|2.302|
|Korea|2.820|2.644|3.105|3.221|3.373|3.636|3.530|3.776|3.545|3.467|
|Malaysia|0.727|0.810|1.010|0.610|0.627|0.704|0.991|1.103|1.176|<br>0.908|
|Philippines|n.a.|n.a.|n.a.|0.830|1.186|1.175|1.148|1.150|1.285|1.129|
|Singapore|0.765|0.922|0.939|0.887|0.856|1.102|0.862|1.037|1.049|<br>0.936|
|Taiwan|n.a.|n.a.|n.a.|0.679|0.883|0.866|0.894|0.796|0.802|0.820|
|Thailand|1.602|1.905|2.159|2.010|1.837|1.914|2.126|2.224|2.361|2.008|
|US|0.798|0.848|0.904|0.972|1.059|1.051|1.066|1.099|1.125|<br>1.034|
|Germany|1.535|1.552|1.582|1.594|1.507|1.534|1.512|1.485|1.472|<br>1.514|

Note: Table A5 reports medians, standard deviations, and sample sizes.

Most East Asian countries saw some increase in leverage in the last few years: this was most notable for Japan, Korea, Malaysia and Thailand. Japan had seen some de-leveraging earlier in the decade, possibly as there was some financial retrenchment, in the early 1990s, but lack of equity and corporate sector difficulties may have meant that no new equity was raised and loans were rolled over in the later part of the period. Leverage consequently rose. The rise in leverage in the Philippines is probably the result of its reforms in the mid-1980s, which led to revived corporate and financial sectors and better financing possibilities.

To study the riskiness of the financial structures of East Asian corporates, we next compare their average 1988-96 leverage ratios with the leverage ratios in the other Worldscope countries (Figure 2). Korean and Japanese firms have the highest leverage among all corporates in this group of countries, while companies in Thailand, Indonesia, and Hong Kong also have among the ten highest leverage ratios. At the opposite extreme, Taiwanese firms show relatively low leverage ratios. Firms in the Philippines, Singapore, and Malaysia also have below-average ratios. The pattern across other regions is also interesting. Western European countries typically display high leverage ratios, with Swiss firms having leverage almost as high as Japanese firms. In contrast, corporates in South American countries (Peru, Chile, Argentina, Venezuela, Colombia) have low leverage, reflecting the less deep banking systems of these countries.

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Figure 2: International Comparison of Leverage <!-- Start of picture text --> Pen.<br>Chile<br>Argentina<br>Venazuela<br>Sr Lank.<br>Aurtalia<br>Taldwan<br>Portugal<br>Now Zeabund<br>Colombia<br>MolaySla<br>Singapore<br>Spahn<br>South Africa<br>Mexico<br>lndia<br>United Kingdom<br>The Philippines<br>Brazil<br>United Statst<br>hreland<br>Poland<br>0<br>N rethneands<br>Canada<br>TuftyI<br>Chine<br>Denma 1h<br>Non,ay<br>Hungary<br>Garmnany<br>Autlat<br>Swadan<br>Pakistan<br>Grerene<br>Hong Kong<br>Indonesia<br>Thailand<br>Belgiumn<br>SwiberiandII_<br>Japan<br>Ko.ea _ _ __<br>0.5 1 1.5 2 2.5 3 3.5<br>Leverage<br><!-- End of picture text --> 10
Long-term debt (as a share of total debt) has been low across the whole period in all East Asian countries (Table 7). Malaysia, Taiwan and Thailand stand out with less than 1/3. Japan and the Philippines have the highest share, **l/2,** while the others are about 0.43. In contrast, about **3/4** of debt of US corporates is long term, while in Germany the ratio is 0.55. In spite of the large attention to the role of short-term debt in the East Asian financial crisis, these data do not suggest a massive buildup in short-term debt for the East Asian countries, at least up to the end of 1996, but rather a consistently low share of long-term debt. In fact, only Japan saw some decrease in the share of long-term debt. As these data do not distinguish foreign exchange from domestic debt, it can of course be that the composition may have shifted away from short-term domestic debt toward short-term foreign exchange debt.

**Table** 7: **Long Term Debt Share for Nine Asian Countries, Germany, and the US**

|||||(%,<br>|median<br>|s)|||||
|---|---|---|---|---|---|---|---|---|---|---|
|County<br>||1988|1989||1990|1991|J1992|1993|1994|1995|1996|[1988-96|
|Hong Kong|59.7|59.5|53.8|_56.5_|44.7|44.7|40.7|37.3|36.4|44.9|
|Indonesia|n.a.|n.a.|n.a.|52.4|40.8|39.6|41.6|41.8|43.3|43.1|
|Japan|49.9|54.1|53.8|49.9|49.4|51.7|47.7|44.4|40.8|48.4|
|Korea|55.7|47.2|49.8|49.8|44.2|43.7|41.4|40.4|41.5|43.7|
|Malaysia|35.8|35.5|32.5|27.1|26.9|26.6|27.2|27.8|29.9|29.2|
|Philippines|n.a.|na.|n.a.|57.2|53.1|50.3|50.2|49.8|51.4|52.2|
|Singapore|57.2|55.4|54.1|33.8|33.8|33.9|40.2|38.6|41.1|43.3|
|Taiwan|n.a.|n.a.|n.a.|53.9|44.4|32.8|34.6|34.3|38.9|35.9|
|Thailand|58.1|49.8|38.8|34.3|25.2|26.4|27.6|32.9|32.8|30.9|
|US|77.7|77.2|76.3|76.7|75.8|76.2|75.2|74.6|74.1|75.9|
|Germany|56.8|55.4|54.5|53.9|55.2|55.4|55.4|55.3|54.7|55.3|

Note: Table A6 reports means, standard deviations, and sample sizes.

The international comparison of the maturity of debt structure (Figure 3) reveals that most East Asian countries rank below European and Latin American countries in their share of long term debt.<sup>4</sup> Among East Asian countries, only corporations from the Philippines have an average share of long-term debt greater than 50%. There is a general tendency for corporates in richer countries to have more long-term debt, as observed by Demirguc-Kunt and Maksimovic (1998) and others. Some other, low-incomeAsian countries (Sri Lanka, Pakistan, China) have indeed low shares of long term debt. But many of the higher-income East Asian countries are outliers to this pattern, as they rely less on long-term debt than what would be expected on the basis of their per-capita income level. Japan, for example, ranks below many other OECDcountries. Among developing countries, Chile stands out as country with a very high share of long-term debt.

4We present the share of long-term debt, rather than the share of short-term debt as the latter can underestimate the amount of liabilities with a short maturity as it excludes, for example, trade credits.

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Figure 3: International Comparison of Long Term Debt Share <!-- Start of picture text --> Malayi<br>Thailand<br>Sri Lanka<br>Pakistan<br>Taiwan<br>China<br>Greeca<br>Turkey - -- -<br>Spain _ __ _<br>Italy<br>SIndoneia<br>SKgaorea<br>Hong Kong<br>Japan<br>Belgium<br>Luxebourg<br>The Plhiiripipines<br>Argentina<br>Germany<br>o Venezujela<br>Mexico<br>Ireland<br>Colombia<br>Portugal<br>Poland<br>France<br>Denmark<br>India<br>United Kingdom<br>Israel<br>South Africa<br>Netherlands<br>Chile<br>Austria<br>Finland<br>Australia<br>Sweden<br>Nerw Zealand<br>United States<br>Switzerland<br>Norway<br>Canada<br>20 30 40 so 60 70 80 90<br>% of Long Term Debt<br>12<br><!-- End of picture text -->
The structure of debt (domestic vs. foreign: short vs. long term) was different across countries, however. Figure 4 and table A7 report the distribution of debt across these four categories in 1996 for the six countries most affected by the crisis. Korea has the highest share of foreign short-term debt share, followed by Malaysia and Thailand. In contrast, the Philippines and Taiwan have the largest share of domestic long-term debt.

**Figure 4: Distribution of Debt in Six East Asian Countries: Foreign Vs. Domestic and Short Vs. Long Term**

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The data also suggest large differences across countries in interest payment coverage. This is calculated as the ratio of earnings before interest and taxes (but adding back depreciation)-that is, EBITDA or operational cash flow-to interest expenses (Figure _5)._ With the low interest rates in Japan, Japanese corporates needed to devote only a small fraction of EBITDA on interest payments, so the interest coverage ratio is about 8 in 1996, followed by Taiwan with 6. 1. Thai and Korean corporates had the lowest interest coverage ratios, about 2.7 and 2.1 respectively.

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Hong Kong, Malaysian, Indonesian and Philippine corporates averaged between 3 and 4 while Singaporean frmns averaged 4.5.

**Figure** 5: **Interest Coverage in Nine Asian Countries, 1996**

<!-- Start of picture text --> 8<br>7<br>6<br>4<br>3<br>HongKong Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand<br><!-- End of picture text -->

# **5. Summary**

There were large differences in perfornmace across countries as measures by return on assets. These differences did not show UP as much in sales growth as investment rates were high and driven output rates in many countries. The high investment and relatively low profitability meant that external financing had to remain high in most countries, with high leverage as outsid equity was used sparingly. While there were no strong trends in the early 1 990s, leverage did increase in Korea and Thailand in the later years, signaling the vulnerability in corporate financial structures, that now has become a very apparent factor in triggering and aggravating the financial crisis. Across countries, the share of (foreign) short-term debt differed considerably in 1996, as did the ability of firms to cover interest payments from earniings. The underlying causes of decreased profitability and increased leverage are still elusive, and will be studied more extensively in future research.

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