Navigating Capital Flows Volatility: Corporate Financing Behaviour in Emerging Markets - Insight from Indonesia

Purpose: This study examines how Indonesian corporations adjust their financing strategies in response to global financial market volatility and the implications of these adjustments on domestic financial stability. Methodology: The research applies Vector Autoregression (VAR) analysis to explore the dynamic relationships among capital flows, corporate external debt, exchange rates, bank lending to corporations, and non-performing loans. The Volatility Index (VIX) is employed as the primary measure of global financial uncertainty, serving as the main indicator of external shocks. Findings: Results show that corporations act as potential conduits for the transmission of global financial shocks to the Indonesian domestic economy. Periods of elevated global uncertainty are often associated with rupiah depreciation and reduced access to foreign funding for Indonesian firms. In such circumstances, corporations tend to adjust by shifting from foreign borrowing to domestic bank loans, which could, in turn, reallocate certain financial risks from firms to local banks. This observed pattern of financing substitution reflects the adaptive strategies employed by corporations in managing funding sources during episodes of global financial stress. Originality: This research offers valuable insights into the ways Indonesian corporations respond to global financial volatility, particularly through adjustments between foreign and domestic financing sources. The study adds to the existing body of knowledge by shedding light on potential risk transmission pathways from international markets to domestic banking systems via corporate financing behavior, thereby enhancing the understanding of macro-financial linkages in emerging economies. Keywords: Banking exposure; Capital inflows; Financing behaviour; Financial vulnerability; Macro-financial linkages.