Financing of non-financial corporations

Corporate financing is an important component of monetary policy transmission. Real corporate financing costs are included in the real monetary conditions index in the core prediction model. This box uses new data for2006 and analyses the evolution of financing of non-financial corporations.

According to the financial results of non-financial corporations with 100employees or more, the structure of financing of large corporations has remained broadly unchanged for the last four years. The ratios of internal and external funds to total liabilities are relatively balanced (roughly 53% and47%). However, the annual rate of increase of internal funds picked up by 2.5percentage points to 11% in 2006, while that of external funds rose by 8.9percentage points to 15%. Within external funds (see Chart 1), corporations used mostly trade credits (around 18%), other liabilities and reserves (around15%), but also drew financial loans (around 12%). Financing through bond issues was negligible (around 2%). By international comparison, the structure of corporate financing in the Czech Republic was roughly similar to that in Hungary and Poland in 2006. Within the financing structure in the Czech Republic, the share of funds of domestic companies in total funds declined, whereas the share of funds of foreign-owned companies rose.9This was inline with the contributions of these companies to economic activity.

The companies monitored achieved their best results ever in 2006 as regards return on equity and return on sales, which increased by 0.7 percentage point to 6.6%10 (see Chart 2). The corporate debt ratio, expressed as the ratio of external funds to equity capital, rose by around 4 percentage points to 91%11in 2006 (see Chart 3). Taking into account financial loans and bonds only, the debt ratio increased by 0.4 percentage point to 26.3%.

Companies drew loans both in the Czech Republic and abroad. The estimated share of domestic loans was around 65% and that of foreign loans around35%. Since the beginning of 2005 annual growth in domestic loans has exceeded growth in foreign loans (around 17% and 2% respectively in 2006Q3) as a result of the negative interest rate differential between domestic and euro area rates. Within domestic financial loans, koruna loans were more prevalent than foreign currency loans. Despite the appreciation of the koruna and expectations of further appreciation, the demand of corporations for foreign currency loans has been stable around 20% for the last four years. The share of foreign currency loans in total loans in the Czech Republic was similar to that in Poland, slightly lower than in Slovakia and significantly lower than in Hungary (see Chart 4). A positive dependence between the interest rate differential and the share of foreign currency loans was visible across all these countries.

So far, the stable structure of corporate financing in the Czech Republic has not indicated any significant changes in the effect of the monetary policy transmission mechanism. The effect of monetary policy is affected by the structure of financing in the sense that it is weakened by the high shares of trade credits and other liabilities in total funds (30% and 60% of total external funds respectively) and by the share of foreign-owned companies. These companies recorded the highest debt relative to their internal funds, with foreign loans accounting for the majority of their debt (an estimated 67%). Consequently, they are sensitive to the euro area real interest rate and to the interest rate differential. Higher growth in domestic koruna loans in the Czech Republic indicates a higher sensitivity of domestic companies in particular to changes in the domestic real interest rate, as 98% of new loans to corporations are granted at a floating rate or with an initial rate fixation of up to 1 year.

The real interest rate on new koruna loans granted to non-financial corporations was relatively low at 2.0% (see Chart 5). It was roughly 1 percentage point lower by comparison with the euro area in 2006. Its evolution was broadly in line with real financial market rates, with a closer link recorded for short-term interest rates (i.e. with an interest rate fixation of up to 1 year) than for long-term ones.