Exports response to changes in credit conditions

Exports represent one fourth of Portuguese GDP and are largely responsible for the economic recovery following the sovereign debt crisis. However, exports and exporters are also fragile as they display a strong dependence on bank credit. This paper studies the impact of an increase in the cost of credit for exporters. This increase is driven by a change in banking regulation (Basel III) which makes giving credit to exporters who sell in high-risk destinations more expensive for banks.

The paper finds evidence of higher costs of credit for exporting firms. Using credit registry data, the results show that exporters face higher interest rates and obtain smaller loans, and the probability that an exporter obtains a loan also decreases.

Exports to high-risk destinations decrease by around 8 percent following the implementation of Basel III (see figure). When exporters are unable to replace these exports with exports to other countries, the results suggest an overall decline in Portuguese exports by almost 2%, representing a 0.5% decrease in GDP. This drop in exports is driven entirely by products that traditionally depend more on bank credit (e.g. manufacturing goods) rather than products that are produced using internal funds. Therefore, exporters change their product mix in response to the increase in cost of credit – they shift from products with a high dependence on credit to products with a low dependence on credit. Finally, the paper finds entry of exporters into new high-risk destinations also decreases. Overall, after the banking regulation change, Portuguese exporters sell fewer products in fewer destinations.

Click here to go to the paper by Joao Monteiro and Pedro Moreira.