Beyond country risk: foreign exchange exposure and financial vulnerability in Peruvian mining companies

Abstract

Background Country risk for the business sector can manifest itself through higher financing costs, more restricted access to credit and adjustments to the capital structure; whilst international studies have identified effects on corporate investment and indebtedness, the relationships in the case of Peruvian mining companies, as well as the moderating role of profitability and the concentration of short-term debt, remain to be explored. Methods To this end, a quantitative, longitudinal and explanatory-predictive approach was adopted, using fixed-effects panel data models for each firm, comprising 210 firm-year observations. Results The findings revealed that country risk has followed an erratic trajectory, whilst financial solvency declined until 2016; the econometric results showed that the EMBI Peru had no significant effect on financial solvency (b = 0.0026; p = 0.964), financial leverage (b = −0.0019; p = 0.907) or the debt ratio (b = −0.0001; p = 0.995); nor were any significant moderating effects observed on profitability or debt concentration; only the exchange rate was significantly associated with financial solvency (β = −0.1022; p = 0.014) and with indebtedness (β = 0.0178; p = 0.033). Conclusion It is concluded that the transmission of sovereign risk to companies’ financial structures was neither direct nor uniform, and that exposure to exchange rate risk was a more significant factor in explaining the financial vulnerability of Peruvian mining companies.