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| David Petitcolin, Emerging Markets Strategist at RBS |
An RBS study suggests that in general, emerging economies will continue to enjoy greater rates of credit expansion but also finds that some have a far greater capacity than others to raise borrowing. Indonesia, the Philippines and Chile are best placed according to our study of 20 emerging, and four developed, economies. China however may be approaching saturation point. The country ranks below Russia, India, Mexico and eight other major emerging economies in terms of potential credit growth, adding to concerns over its already-cooling economy. Private debt in China grew by a robust 16 per cent in the year to July. However, that has raised its debt stock to 130 per cent of GDP – higher than some more mature markets such as Australia.
Britain and the United States are ranked last in the RBS study, while Hungary, South Africa and Israel are the lowest ranking emerging economies. Their lowly position may have important implications for the effectiveness of monetary policy. With limited space to expand credit, further monetary easing is unlikely to foster greater private-sector borrowing and thus generate a credit-led recovery.
Though quantitative easing and record-low interest rates may have prevented these economies from an even more pronounced downturn, the findings reinforce a view that these countries have little alternative to a lengthy, and painful, period of de-leveraging.
The study calculates the potential credit expansion within an economy and produces a composite score based on its banks' loan-to-deposit ratio, the size of government debt relative to economic output and the current stock of private-sector credit.
For example in the United States, existing levels of private debt are already equivalent to 190 per cent of GDP, its bank loans are equivalent to 109 per cent of deposits – limiting available funding – and government debt is second only to that of Japan (at 100 per cent of GDP). High public debt matters because it raises the likelihood of eventual spending cuts and tax increases, which would chill the economy and sap consumers' appetite for credit.
Most emerging economies tightened monetary policy until the beginning of this year over inflation fears. That has slowed the pace of credit expansion a little, but banks are still extending debt to households and business at a healthy rate.
Unsurprisingly, private lending is expanding fastest in markets with the lowest loan penetration. On that basis, the likes of Indonesia, the Philippines, Mexico and Columbia – all with stocks of debt under 40 percent of GDP – could soon outstrip countries such as Thailand, where credit grew by 15 per cent last year, but where debt-to-GDP now stands at 124 per cent.
Taiwan, India and the Philippines do best on the second indicator – available bank funding for credit – while banks in Korea, Romania and Hungary have more stretched loan/deposit ratios. In terms of public debt, Indonesia, Chile and Russia have the lowest debt positions, but the Indian, South African and Thai governments have higher debt levels and therefore appear more likely to adopt austerity measures that could diminish demand for credit.
Indonesia and the Philippines, which lead our composite rankings, already have some of the fastest growing debt markets. Both are expected to grow around 6 per cent this year and there is little to suggest credit expansion in either archipelago nation will ease off in the near future. Some have expressed concern that Indonesia's 26 per cent year-on-year surge in borrowing is inflating a credit bubble. I am less convinced, given that demand is principally from companies funding working capital, not consumers, credit quality is strong and its central bank has built strong macro-prudential buffers to avoid over-heating.
While our model helps identify which countries have greatest scope to expand credit, it does not necessarily imply that credit will expand at that rate. It only estimates the space for further borrowing. The vital missing ingredient is confidence. Eastern European countries such as the Czech Republic score better than Asian economies such as Malaysia but actual private sector growth there has been weak, reflecting weak appetite for credit. Indeed, other factors, such as the euro zone's troubles, will clearly remain a major influence on consumers' and businesses' appetite for credit.
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