Global credit growth to slow further says Fitch

Fitch Ratings says in its latest ‘Macro-prudential Risk Monitor’ that global real lending growth slowed to 4% in 2011 and is forecast to fall further this year.

“Fitch forecasts global bank credit to weaken to just 3% in real terms this year. Nonetheless, a handful of emerging markets have been experiencing a combination of rapid credit growth and asset price inflation that has been associated with bubbles in the past,” says Richard Fox, Senior Director in Fitch’s Sovereign group.

Last year’s 4% real credit growth and this year’s forecast 3% are well below a pace that would cause renewed concerns about overlending. Rapid lending growth is confined to a handful of emerging markets (EM), some of which move into Fitch’s higher Macro-prudential risk category (MPI 3) in this report. Credit growth in developed markets remains stagnant and is forecast to slow in all EM regions this year, notwithstanding continued rapid nominal lending growth in some of the larger countries.

The recovery of credit growth seen in 2010 to 5% has not been sustained. Amongst EM regions, growth is forecast to remain fastest in Asia at 9%, but this is down from 11% in 2011. Credit growth is forecast to slow particularly sharply in Latin America, where growth is expected to halve to 5% this year.

Only Brazil is likely to buck the trend amongst the major Latin American economies with forecast higher credit growth in 2012. Growth in the Middle East and Africa is forecast to slow to a similar 5%, though some GCC countries may see a pick up. Emerging Europe continues to experience the slowest EM credit growth with barely 3% real growth expected this year.

Fitch has extended its country coverage in this report to all rated sovereigns, including an additional 20 EMs for the first time. Two-thirds of the new countries are in Africa.

Three newly-added African countries – Lesotho, Mozambique and Uganda – attract the highest risk score of MPI 3 due to the combination of rapid credit growth, rises in real estate or equity prices or the real exchange rate. Peru also becomes MPI 3. In all these countries except Lesotho, lending growth has dropped sharply from its peak, however.

Colombia and Lebanon drop out of the MPI 3 category due to data revisions. Countries that remain MPI 3 based on past triggers are Argentina, China, Cyprus, Hong Kong, Indonesia, Sri Lanka and Turkey.

Because of data weaknesses in some of the new countries added, Fitch is introducing a new designation of MPI 2*. The asterisk indicates where an MPI score is based on real lending growth and just one other indicator (usually the real exchange rate). This is because where lending growth is fast enough to trigger an MPI 2 score, an MPI 3 score might be triggered if the additional indicators were available.

Despite continuing sluggish credit growth, credit/GDP on average in developed countries shows little sign of falling significantly. Over three-quarters of these countries still have scores of at least MPI 2, denoting above trend credit/GDP over the past three years.

Given historical rising trends, credit/GDP is nevertheless falling relative to trend and around half of developed markets had below trend credit/GDP in 2011. MPI scores in the developed world will gradually fall therefore. Only two developed countries remain MPI 3, Cyprus and Hong Kong.

The introduction of Viability Ratings (VR) last year has led to a change in the calculation of the BSI. The BSI aims to measure a banking system’s standalone financial quality or strength and is now a simple weighted average of bank VRs for a critical mass of a country’s banks.

As a result of the change, BSIs are now distributed more evenly across a larger number of BSI categories corresponding to VRs. The typical developed country banking system is BSI ‘a’ whereas the typical EM system is in the range ‘bbb/bb/b’. The report includes a comparison of new and old BSIs.

This report updates the systemic risk indicators Fitch has published since 2005. Formerly the Bank Systemic Risk Report, the Macro-Prudential Risk Monitor identifies the build-up of potential stress in banking systems due to a specific set of circumstances: rapid credit growth associated with bubbles in housing or equity markets, or appreciated real exchange rates, the latter sometimes associated with asset market bubbles. The focus of the report is therefore on only one potential source of bank systemic stress.

The latest ‘Macro-prudential Risk Monitor’ is available at www.fitchratings.com.