adminNew York. – The world’s largest emerging markets recovered quickly from the 2008 financial crisis because consumers and companies went on a borrowing binge. Now that credit spree is coming back to haunt banks in those countries.
As economies cool, delinquent loans are rising from Turkey to South Africa. India is injecting money into state-run lenders facing a surge in soured debt, while Chinese banks have been told to increase provisions for the same reason.
An outflow of funds from emerging markets earlier this year, sparked by speculation that the Federal Reserve would soon begin tapering its easy-credit policy, forced up interest rates in those countries and pushed down currencies.
While the flight of capital halted after the Fed decided in September to continue its asset purchases, a reversal could threaten economies and banks in developing nations.
“Credit growth in emerging markets has been phenomenal since 2008 because risk has been under-priced once again, thanks to zero percent interest rates in the developed world,” said Satyajit Das, author of a half dozen books on financial risk who is based in Sydney.
“Many borrowers will struggle to repay the debt, and the money flows out of these markets will make the problems worse. We’re ripe for a new emerging-market crisis.”
Even China, which doesn’t rely on inward cash flows to finance its economic expansion, faces a choice of restructuring its indebted and inefficient state-owned industries or allowing inflation to take hold, according to Das and other analysts. Like their Western counterparts, emerging-market governments probably will rescue failing banks if credit deteriorates, adding to those countries’ economic woes, Das said.
The MSCI Emerging Markets Banks Index has dropped 6 percent this year, compared with an 18 percent gain for the MSCI World Banks Index, which tracks lenders in developed markets.
While it’s natural for lending to expand along with an economy, credit has outpaced economic growth in most emerging markets. In China, borrowing by companies surged to 132 percent of gross domestic product last year from 104 percent in 2008, according to the World Bank.
In Turkey, it jumped to 54 percent from 33 percent and in Brazil to 68 percent from 53 percent. Credit in South Africa exceeded 150 percent of GDP in 2012. Consumer debt is growing just as fast in some countries.
Those increases have taken place against a backdrop of slowing economies. China, which expanded at an average rate of 10,6 percent in the decade ending 2011, grew only 7,7 percent last year, according to data compiled by Bloomberg. India’s 5 percent growth last year was down from a 7,8 percent average.
Banking crises typically are preceded by asset-price bubbles, large capital inflows and credit booms, according to a study by Harvard University professors Carmen Reinhart and Kenneth Rogoff. Their analysis of 66 countries over two centuries, published in the November issue of the Journal of Banking and Finance, found that the causes for the crises are the same in developed and emerging economies.
Since Brazil’s largest banks curtailed lending last year, the government has used state-owned firms to continue expanding credit. State lenders’ share of loans jumped to more than 50 percent of the total from about 35 percent in 2007, according to central bank data. – Bloomberg.
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