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Our banking risk experts provide insight into events impacting
the financial sector in emerging markets in July.
Mainland Chinese authorities' push for further
deleveraging
Introduction of a blanket loan moratorium across Asia
Extended blanket moratorium in Hungary, despite central bank
warnings
Growing tensions between Nicaraguan banks and the
government
Haircuts on foreign currency deposits in Lebanon
Ongoing liquidity squeeze in Nigeria's banking sector
July likely marking a continued push to financial sector
stability in Mainland China.
The centenary of the Chinese Communist Party is marked 1 July,
and there has been news regarding issues facing China Huarong Asset
Management Company as well as repayment difficulty rumors
surrounding a large corporation in mainland China. Faced with an
important month and continuous aim for sectoral stability, the
mainland Chinese authorities will likely push for further
deleveraging, after banks had been told to curb lending earlier in
2021.
COVID-19 resurgence in Asia increases the chance of
blanket loan moratorium.
Across South Asia, economies have witnessed rising numbers of
COVID-19 cases, which had in many situations caused extended
lockdowns. As with Malaysia, which introduced an expanded loan
moratorium for six months, more economies, including Thailand,
Bangladesh, Pakistan, and the Philippines, will likely look at
extending and expanding current loan-moratorium arrangements to
coincide with enhanced movement controls.
Disagreements between the central bank and the
government over the moratorium extension in Hungary.
A blanket loan-payment moratorium in Hungary will remain in
place until the end of September. The government has signaled that
this support measure may be extended further; however, the central
bank has warned that the costs of such measures would outweigh the
potential benefits. We expect to see more disagreements next month
between authorities regarding the moratorium extension. Our main
concern is increasing Stage 2 loans, which indicates rising credit
risk for banks. While NPL ratios are low and capital buffers are
robust, a prolonged blanket moratorium could lead to
larger-than-expected losses when it expires.
Growing tensions between Nicaraguan banks and the
government continuing to affect impairment and credit
growth.
The executive president of the main bank of Nicaragua, El Banco
de la Producción (Banpro), was arrested in mid-June. This was part
of a move by the government to limit opposition participation
before the elections in November 2021. Because this adds to the
list of recent tensions between the government and the sector, we
expect that further rigidities will build-up, particularly as
November approaches. These tensions have increased the skittishness
of the sector - resulting in a contraction of credit growth - and
have amplified impairment through reduced economic activity -
issues that are likely to continue over the following months.
Haircuts on foreign currency deposits in
Lebanon.
In late June, the central bank of Lebanon requested legal
permission to utilize banks' required foreign currency reserves to
lend to the government to subsidize vital imports. IHS Markit
anticipates that this decision will lead to protests from foreign
currency depositors and that it signals official haircuts on
foreign currency deposits are growing increasingly likely. Bank
deposits with the Bank of Lebanon (Banque du Liban: BDL) represent
78% of total banking sector deposits. As of March 2021, official
foreign exchange reserves were reportedly USD15 billion. However,
required reserves are also intended to be used to support the BDL's
deposit withdrawal plan announced in May.
Ongoing liquidity pressures in Nigeria's banking
sector.
The Nigerian banking system is experiencing a liquidity squeeze
as the Central Bank of Nigeria (CBN) maintains its cash reserve
ratio (CRR) at 27.5%, instituted in January 2020. This is alongside
negative real lending rates owing to high inflation. In our view,
banks will look to charge double-digit rates to hold deposits from
institutional customers, while seeking to raise interest rates on
variable loans. To further protect their earnings, banks are likely
to apply specific risk-management techniques like retaining
dividend pay-outs.
Posted 02 July 2021 by Natasha McSwiggan, Senior Economist, Banking Risk, IHS Markit
