Emerging market bank lending conditions suffer sharp decline

What drives growth in emerging markets? For many, it used to be the commodities supercycle. When that ran out of steam, credit took over, driven by expansionary monetary policies in the developed world and by an increasingly urgent, some might say desperate, search for yield among international investors.

Both cycles resulted in huge capital flows to emerging markets, allowing banks to lend out floods of money and draw tens of millions of people into the consuming classes for the first time. But credit growth, too, has stalled.

A report this week from the Institute of International Finance shows that bank lending conditions deteriorated sharply in the first quarter of 2015. The IIF's composite index of lending conditions - which collates the results of 14 questions sent to about 130 banks operating across the emerging world - is at its lowest level since the end of 2011. At 48.1, it is deeply into the sub-50-point negative territory that denotes tightening rather than expansion of credit conditions.

What is the cause of this contraction? The balance of blame lies heavily on the demand side. The IIF points to a sharp decline in loan demand, where the index is at its lowest level since the series began in 2009. Demand for credit fell sharply across all five regions in the IIF's survey.

There are some regional variations but in the first quarter, demand is down across the board. In all sectors - corporate loans, consumer loans and commercial and residential real estate - it is the same story. EM borrowers, it seems, have maxed out on credit.

The IIF's results are in line with figures presented by Bhanu Baweja and colleagues at UBS this week in their monthly report, EM Economic Perspectives. They show that, at the end of last year, credit growth in emerging markets as a whole was at its lowest level since 2010, in the immediate aftermath of the global financial crisis.

There has since been a slight uptick in the rate of growth of total domestic credit, which accelerated from 12.8 per cent in October to 13.9 per cent in January, the latest month in the series. Growth in credit provided by the private sector, however, remains near its year-end low, at 12.8 per cent.

The discrepancy between the rate of credit growth as a whole and the rate of growth in credit provided by the private sector suggests that, as happened after the global financial crisis of 2008-09 and after the eurozone crisis of 2011, public sector lenders are stepping in as the private sector pulls out.

The figures must be approached with caution. In Brazil, for example, they show that the rate of growth of total credit rose from 6.9 per cent to 11.8 per cent in the year to January, even as growth in private sector credit fell from 13.5 per cent to 11 per cent. In both cases, credit is growing at quite a clip, although less so when you remember that inflation is running at more than 8 per cent a year. Here as in other countries, the greater weight in credit provision by the public sector is largely a result of a contraction of activity in the private sector.

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