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New COVID-19 variants will potentially derail asset-quality
improvement in economies heavily reliant on the tourism sector in
Emerging Asia
Tighter macroprudential measures and credit policy could occur
in Emerging Europe
Political changes and elections will likely affect foreign
exchange volatility and the structure of banking sectors in Latin
America
A restart of state-owned bank privatization drives could occur
in North Africa banking sectors
Increased holdings of government securities could translate to
increased exposure on sovereign risks for banks in Sub-Saharan
Africa
For 2022, risks and uncertainty remain heightened, leaving banks
and banking sector regulators in a "wait-and-see" position. The
sizeable support measures introduced early in the pandemic are
largely being phased out or have already been removed, many in the
latter half of 2021. Against a background of tightening global
monetary policy, high inflation, expected slowdown in the
macroeconomic recovery, and new COVID-19-related uncertainties,
2022 will test how successful these measures truly were - if they
prevented businesses from failing or just delayed recognition of
new NPLs.
Emerging Asia
New COVID-19 variants will potentially derail
asset-quality improvement in economies heavily reliant on the
tourism sector.
Most economies in Asia are either elongating loan-repayment
assistance programs or creating new hybrid systems to restructure
loans to reduce stress on borrowers, especially in the face of
renewed lockdowns in more developed economies amidst new COVID-19
variants. Economies that had hoped to reopen their borders to
tourists will likely see brief improvements in loan repayments
reversed. Thailand, for example, which reopened its border to
tourists in November, quickly reported better loan-repayment rates
as a result. With the Omicron variant forcing the introduction of
tighter quarantine standards, this improvement will likely
dissipate in 2022. Considering 20% of Thailand's GDP is linked to
tourism, this is expected to raise fresh credit risk and
potentially encourage authorities there, and in other
tourism-dependent economies in the region, to reintroduce more
relaxed lending standards to support the battered sector, further
delaying the recognition of bad assets.
Emerging Europe
Tighter macroprudential measures and credit policy could
occur.
Some economies in Europe are vulnerable to a potential boom-bust
scenario due to excessive house-price rises, strong and sustained
mortgage growth, and the relatively high indebtedness of
households, with the house-price rate accelerating the most in
Estonia, Czechia, and Lithuania during the first half of 2021.
Potentially sharp corrections in house prices would result in
higher defaults and credit losses, with negative spill-over effects
on other sectors. Regulators in Bulgaria, Czechia, and Romania are
the first to announce countercyclical measures to curb household
lending growth, phasing in higher countercyclical capital buffer
requirements from mid-to-late 2022. Other regulators are expected
to deploy similar measures if housing prices and household credit
continue rising at a fast clip and the introduction of tighter
borrower-focused measures such as lower loan-to-value limits cannot
be ruled out.
Latin America
Political changes and elections will likely affect
foreign exchange volatility and the structure of banking
sectors.
In economies such as Costa Rica and Colombia, upcoming elections
will likely increase foreign exchange volatility, particularly if
the winning candidates support a more interventionist agenda.
Although in Colombia the exposure of the banking sector to foreign
exchange is limited, Costa Rica is more likely to be affected given
its high levels of dollarization in both its credit portfolio and
deposits. In the case of Chile, there will be a referendum in
mid-2022 to change the current constitution. The draft text of this
has not been released, but there is some likelihood that the
structure of the financial sector will be changed, particularly
through the revision of the private pension system and the role of
the central bank. Such measures would have a substantial effect on
the funding of Chilean banks and the regulatory structure governing
them.
Middle East and North Africa
A restart of state-owned bank privatization drives could
occur in North Africa banking sectors.
While state ownership of local banks is expected to remain
dominant throughout the Middle East and North Africa region, two
economies - Algeria and Egypt - have previously committed to reduce
the role of state-owned banks in their respective sectors and could
take additional steps towards that goal in 2022 as they seek to
supplant revenue lost because of the COVID-19 pandemic. These
privatization drives have so far been slow to materialize and have
lacked detail but are likely to consist of authorities offering
minority stakes in select state-owned banks. Such deals have proven
less attractive in recent years but could garner interest from
large Gulf banks looking to increase their foothold in North
Africa, increasing competitiveness in the sectors if accompanied by
independent audits of state-owned enterprise debt and
recapitalization.
Sub-Saharan Africa
Increased holdings of government securities could
translate to increased exposure to sovereign risks.
Delays in fiscal consolidation across the region raise concerns
for private-sector credit recovery and increase bank-sovereign
linkages. The region's public debt load has increased
significantly, with banks taking up a larger share of domestic
public debt. For instance, the Kenyan government sources around 50%
of its domestic debt from the banking sector. Banks across the
region diverted their portfolios towards the perceived safety of
more liquid public assets during the COVID-19 pandemic. IHS Markit
experts expect banks' risk appetite to stay muted as NPLs rise,
boosting their holdings of government securities and increasing
their exposure to sovereign risks. Economies like Ghana, Angola,
Kenya, Uganda, Zambia, and South Africa are worth monitoring in
this regard.
Posted 11 January 2022 by Natasha McSwiggan, Senior Economist, Banking Risk, IHS Markit
