18 April 2017
With growth improving across many emerging markets and foreign inflows on the rise, how are domestic credit conditions responding? Are improved growth prospects and stable liquidity conditions translating into rising credit growth? It turns out, with a few exceptions, credit growth remains fairly weak across even the faster growing EM economies. China continues to be an exception with credit rapidly outpacing nominal growth, albeit slowing at the margins. Even as broad credit growth moderated slightly in March, credit-to-GDP continues to expand, driven by household borrowing (see Chart 10). Outside China, economies still recovering from macro imbalances such as Russia, India and Brazil continue to have weak credit dynamics due to either a lack of loan demand or a banking system unable, or unwilling, to expand new loans.
Credit growth in India continues to mystify. It is officially the fastest-growing large EM, but in a primarily bank-funded economy (bank lending provides roughly 80% of total financing needs), credit growth is at historically low rates. Indian GDP grew at 7% in real terms in Q4 last year and at 10.6% in nominal terms, despite bank credit growth collapsing to multi-year low of 6% y/y. Credit growth has further weakened over the first quarter of 2017, dropping to a multi-decade low of 4.1% y/y in March. This collapse brought credit growth below real GDP for the first time since 1980; in other words never before has GDP growth data been so out of sync with the bank credit data (see Chart 11). Even after adding non-bank borrowing, credit growth trends remain exceptionally weak. The reasons why Indian credit growth is lacklustre are fairly well-known and understood. Indian corporates are highly leveraged following excesses in recent years and have little appetite for new borrowing. Meanwhile, India banks still have impaired balance sheets, with little ability to extend new loans. However, the anomaly between weak credit growth and GDP still remains a mystery. Demonetisation is likely having an effect, especially in January and February, but the credit demand started to weaken before the surprise policy move and has not bounced back significantly. While there are some possible explanations for weak bank lending data, such as large-scale bond issuance or financial disintermediation, it’s likely that official GDP is overstating actual growth figures and unless credit growth picks up (and thus investment) growth momentum is also likely weakening.
In Brazil, credit growth is also signalling weaker-than-consensus growth momentum. Nominal credit flows continue to contract, with lending weak across both public banks (-8.9% y/y in February) and private banks (-6.6% y/y). Going forward, the credit crunch will likely ease due to the central bank’s front-loaded rate-cutting cycle and macro stabilisation. However, weak labour market dynamics and still-high levels of household indebtedness will likely limit both the supply of, and demand for, credit. Elsewhere, negative credit gaps are emerging. Indonesia’s rate-cutting cycle has not transmitted to stronger credit growth, mainly on account of low corporate loan demand. While it is positive that EM economies are not engaging in credit excesses, the current weakness across many countries does not bode well for future potential growth.
Alex Wolf, EM Economist