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Our banking risk experts provide insight into events impacting
the financial sector in emerging markets in November.
Looser mortgage lending by banks to improve liquidity of real
estate companies
Asset-quality improvements in Thailand after tourism sector
opens up
Policy rate cuts in Turkey to increase bank funding costs,
challenge debt-servicing capacity amongst corporate borrowers and
re-ignite credit risks
Higher taxes for banks after the extension of COVID-19
emergency aid through 2022 in Brazil
Declining real policy rates in Sub-Saharan Africa economies
signalling upside risks to the interest-rate outlook in 2022
Looser mortgage lending likely reduces the chance of
hard landing for real estate companies.
Mainland Chinese authorities have asked banks to speed up
mortgage approval in the fourth quarter of 2021. IHS Markit experts
believe that combined with the discounts introduced by developers,
this will likely boost sales of new properties in mainland China.
Despite the price falls recorded by some major cities in recent
months, this will likely support the liquidity of developers in the
short term and potentially improve their ability to repay their
debt.
Thailand's asset quality improvement is due to the
opening up of the tourism sector.
The Thai government announced that it will open up the tourism
sector starting in November. Although accommodation and food
service activities - a good proxy of the tourism sector - account
for around only 2.5% of total lending, IHS Markit experts judge
that because the tourism sector accounts for around 8.0% of total
employment, the opening-up of the tourism sector will also benefit
the overall personal lending portfolio, which accounts for nearly
30.0% of total loans.
Policy rate cuts in Turkey to increase bank funding
costs, challenge debt-servicing capacity amongst corporate
borrowers, and re-ignite credit risks.
The Central Bank of the Republic of Turkey (Türkiye Cumhuriyet
Merkez Bankası: TCMB)'s decision to cut its main policy rate, the
one-week repo rate, by 200 basis points, to 16.0% on 21 October, on
the same day the Financial Action Task Force (FATF) added Turkey to
its "grey list" is likely to yield portfolio investment outflows,
trigger more substantial depreciation of the lira in both late 2021
and throughout 2022, and increase inflationary pressure. For banks,
the timing of the rate cut yet again comes during the rollover of
banks' annual syndicated loans. Although not as important as the
spring roll-over period, the FATF designation and weaker lira are
likely to increase costs and reduce appetite for this debt. The
policy rate cut is furthermore likely to push lending rates back
into negative territory, putting pressure on profitability even as
credit growth is likely to re-accelerate from a recent dip. The
strong lira depreciation meanwhile will put downward pressure on
capital buffers and force banks to source more expensive swaps and
derivatives to close their own on-balance sheet exposure to the
weaker lira.
Banks in Brazil are likely to experience increased taxes
after the extension of COVID-19 emergency aid through
2022.
COVID-19-related aid targeted to low-income sectors was
initially due to end in October, but President Jair Bolsonaro's
government indicated repeatedly that the measures would be
extended. This aid was extended despite warnings from the Ministry
of Economy that such spending would breach a constitutionally
mandated budget cap. In turn, the government will likely aim to
speed up an increase in levies for banks that is currently being
discussed in Congress, likely leading to a decrease in
profitability in the sector.
Declining real policy rates in Sub-Saharan Africa
economies signal upside risks to the interest-rate outlook in
2022.
The COVID-19 pandemic has prompted various central banks across
the Sub-Saharan Africa region to cut policy rates in many cases to
historical lows. In many Sub-Saharan Africa economies, inflation is
rising despite negative risks to aggregate demand amidst the
ongoing pandemic and slow vaccine rates. Food prices are pressured
by local shortages and the rise in global food prices. Core
inflation, impacted by pandemic-induced supply-demand mismatches,
rising commodity prices, adverse exchange-rate developments,
transportation costs, and policy-related developments, has also
increased in many economies, albeit to a lesser extent.
Nevertheless, real policy interest rates have declined in Angola,
Ghana, Kenya, South Africa, Tanzania, Zambia, and Ethiopia in the
third quarter of 2021. IHS Markit experts expect central banks in
these countries to be very conscious of their economies' fragile
recovery. However, if the upward pressure on prices turns out to be
more than transitionary, the risks to the interest-rate outlook
will be tilted towards the upside. Price developments in these
countries that could trigger a rise in interest rates in 2022 will
thus be closely monitored. Increased interest rates are likely to
adversely affect borrowers' debt-servicing capacity and the demand
for new loans while providing some uplift to profit forecasts.
Posted 04 November 2021 by Natasha McSwiggan, Senior Economist, Banking Risk, IHS Markit
