We study the influence of external financial factors on economic activity in emerging economies (EMEs) motivated by a considerable increase in foreign financing by the corporate sector in EMEs since the early 2000s, mainly in the form of bond issuance. We build a quarterly external financial indicator for several EMEs using bond-level data on spreads of corporate bonds issued in foreign capital markets, and examine its relationship with economic activity. Results show that the indicator has considerable predictive power on future economic activity. Furthermore, an identified positive shock to the financial indicator generates a large and protracted fall of real output growth, and about a third of its forecast error variance is associated to this shock. These findings are robust to controlling for possible spillovers from sovereign to corporate risk, among other things.

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