No more easy credit for emerg­ing mar­kets: BIS

The Pak Banker - - COMPANIES/BOSS -

The surge in lend­ing to emerg­ing mar­kets that helped fuel their own - and much of the world's - growth over the past 15 years has come to a halt, and may now give way to a "vi­cious cir­cle" of delever­ag­ing, fi­nan­cial mar­ket tur­moil and a global eco­nomic down­turn, the Bank for In­ter­na­tional Set­tle­ments (BIS) has warned.

"In the risk-on phase [of the global eco­nomic cy­cle], lend­ing sets off a vir­tu­ous cir­cle in fi­nan­cial con­di­tions in which things can look bet­ter than they re­ally are," said Hyun Song Shin, head of re­search at the BIS, known as the cen­tral bank of cen­tral banks. "But flows can quickly go into re­verse and then it be­comes a vi­cious cir­cle, es­pe­cially if there is lev­er­age," he told me­dia.

That re­ver­sal has al­ready taken place, ac­cord­ing to BIS data. The to­tal stock of dol­lar-de­nom­i­nated credit in bonds and bank loans to emerg­ing mar­kets - in­clud­ing that to gov­ern­ments, com­pa­nies and house­holds but ex­clud­ing that to banks - was $3.33 tril­lion (Dh12.22 tril­lion) at the end of Septem­ber 2015, down from $3.36 tril­lion at the end of June.

It marks the first de­cline in such lend­ing since the first quar­ter of 2009, dur­ing the global fi­nan­cial cri­sis, ac­cord­ing to the BIS.

The BIS data add to a grow­ing pile of ev­i­dence point­ing to tight­en­ing credit con­di­tions in emerg­ing mar­kets and a sharp re­ver­sal of in­ter­na­tional cap­i­tal flows. Chris­tine La­garde, man­ag­ing di­rec­tor of the In­ter­na­tional Mon­e­tary Fund, has warned of the threat to global growth of an im­pend­ing cri­sis in emerg­ing mar­kets. The In­sti­tute of In­ter­na­tional Fi­nance (IIF), an in­dus­try body, said last month that emerg­ing mar­kets had seen net cap­i­tal out­flows of an es­ti­mated $735 bil­lion dur­ing 2015, the first year of net out­flows since 1988.

In Novem­ber, the IIF warned of an ap­proach­ing credit crunch in emerg­ing mar­kets as bank lend­ing con­di­tions de­te­ri­o­rated sharply. This month, it said a con­trac­tion over the past year in the liq­uid­ity made avail­able to the world's fi­nan­cial sys­tem by cen­tral banks, pri­mar­ily those in de­vel­oped mar­kets, now pre­sented more of a threat to global growth than the slow­down in China and fall­ing oil prices.

Jaime Caru­ana, gen­eral man­ager of the BIS, said that re­cent tur­moil on equity mar­kets, dis­ap­point­ing eco­nomic growth, large move­ments in ex­change rates and fall­ing com­mod­ity prices were not un­con­nected, ex­oge­nous shocks but in­dica­tive of ma­tur­ing fi­nan­cial cy­cles, par­tic­u­larly in emerg­ing economies, and of shifts in global fi­nan­cial con­di­tions.

He noted that, while some ad­vanced economies had re­duced lev­er­age af­ter the cri­sis, debt had con­tin­ued to build up in many emerg­ing economies. "Re­cent events are man­i­fes­ta­tions of ma­tur­ing fi­nan­cial cy­cles in some emerg­ing economies," he said. The prob­lem was ag­gra­vated, Shin added, by the de­te­ri­o­rat­ing qual­ity of the as­sets fi­nanced by the lend­ing boom. He noted that the in­debt­ed­ness of com­pa­nies in emerg­ing mar­kets as a per­cent­age of GDP had over­taken that of those in de­vel­oped mar­kets in 2013, just as the prof­itabil­ity of emerg­ing mar­ket com­pa­nies had fallen below that of de­vel­oped mar­ket ones for the first time.

Since then, lev­er­age in emerg­ing economies had in­creased fur­ther as prof­itabil­ity had de­creased, with ex­change rates play­ing an im­por­tant role. "Stronger EM [emerg­ing mar­ket] cur­ren­cies fed into more debt and more risk tak­ing. Now that the dol­lar is strength­en­ing, we have turned into a delever­ag­ing cy­cle in emerg­ing mar­kets. So there is a sud­den surge in mea­sur­able risk; all the weak­nesses are sud­denly be­ing un­cov­ered."

He added: "The is­sue is not just for emerg­ing mar­kets. It is spilling back into de­vel­oped mar­kets. The broader fi­nan­cial mar­kets are re­coil­ing from risk, and that spreads across all mar­kets. The prob­lem now is that the real econ­omy is be­ing af­fected." Caru­ana urged pol­i­cy­mak­ers to recog­nise the sig­nif­i­cance of the stock of global debt and to ad­dress it through longterm rather than short-term mea­sures. "Un­less pol­icy is guided by a long-term per­spec­tive, short-term fixes may end up be­ing just a pal­lia­tive that only puts off the bad day," he said.

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