Credit growth is weakest where it is most needed (US), has turned weaker than people are comfortable with in some places (China) and is still strong where not needed (EM economies like India, Brazil, Russia and Turkey).
But the fears are overdone, in our opinion.
The EM world under our coverage shows credit growth broadly in line with the economic recovery and suggests no immediate reason for concern. In some countries where we see an elevated risk of a credit bubble, policymakers will need to be vigilant going forward (China, India, Brazil, Russia, Turkey, Indonesia); elsewhere risks appear more moderate (South Africa, Korea, many of the low credit growth CEEMEA countries).
Liquidity
Any EM credit boom-and-bust cycle will be in no small part thanks to ultra-easy monetary policies of the DM central banks. Nobel Laureate Joseph Stiglitz recently declared: “Most people around the world feel that QE2 has led toward a flood of liquidity, which has not helped the country that needs liquidity, which is the United States, but rather has caused enormous disturbances in other parts of the world – booming emerging markets, which are not in need of additional liquidity.”
In DM economies, credit growth is dragging along at extremely low levels, and even though loan growth in China has fallen since the beginning of the year, credit growth appears to remain strong in other EM economies. Thus, credit growth is creating more confusion at a time when investors are already uncertain about the growth outlook.
However, consistent with our constructive view on global growth and EM resilience, the risks from apparently misfiring credit are overdone, in our opinion.
The broad-based economic recovery and policy support in the US implies upside risk for credit growth there, while credit strength in EM is in line with the nature of the global two-track recovery. As for China, credit is actively used as an important (perhaps the most important) tool of monetary policy; it is more of an instrument, and less of a signal about fundamentals.
Policy rates
Lending in China thus reflects the desired tightening of policy by the People’s Bank of China, a strategy that can be arrested or reversed rapidly if necessary. With the exception of Turkey and South Africa, the EM world under our coverage shows credit growth broadly in line with the economic recovery and suggests no immediate reason for concern.
The risk to this benign scenario emanates from near-zero real policy rates in the EM (and DM) world designed to keep growth from falling sharply, a policy that could fuel further credit growth at a pace that outstrips fundamentals and might require more aggressive tightening later. A recent study from the IMF finds that loose EM as well as global monetary conditions could push credit growth higher.
For now, the risks are typically small and credit issues are manageable because
- credit penetration in most EMs is low, suggesting a lower impact of credit on the economy,
- slowing growth should endogenously curb credit growth, and
- policy tightening already applied (in China, India, Brazil) or under way (in Turkey and Russia) should also put a brake on credit growth.
However, if the inflation/growth mix were to turn adverse, credit growth would start to look more out of sync with fundamentals, pushing NPLs higher and increasing the prospect of a hard landing. In this sense, credit in these economies is itself levered to macroeconomy.
Elevated risk of credit bubble: China, India, Brazil, Russia, Turkey, Indonesia.
Low risk of credit bubble: South Africa, Korea, many of the low credit growth CEEMEA countries.
