Our banking risk experts provide insight into the events that will impact the emerging markets financial sector in July.
- Pakistani banks are further supporting public finances by buying more sovereign debt, which affects their ability to disburse more loans
- Extended public moratoriums or new support measures for borrowers in Central Europe and the Balkans
- Panama’s Action Plan to Get Off the Financial Action Task Force Gray List
- Strong household borrowing gives way to increased business demand in the Gulf
- Mozambique Q4 2021 Asset Quality Data Released Following Expiry of Forbearance Measures
Pakistani banks are likely to further support public finances by buying more sovereign debt, which will affect their ability to lend more.
The Pakistani government has already received loans from China to replenish its foreign currency reserves despite its interest rate already rising to almost 14%. Local banks are likely to be asked to continue buying sovereign debt instruments – such as Pakistan investment bonds – to support public finances and will also be likely to face higher foreign reserve requirements to help the fiscal situation and the government’s currency position, both of which are likely to affect banks’ ability to disburse more loans due to the crowding-out effect.
The re-emergence of borrower support measures in Central Europe and the Balkans (CEB).
With the announcement of new measures by some Central European states – such as Poland in April, Hungary in June and Romania (with a moratorium on loans from July 1) – and the increase in the cost of life in the region following the Russian invasion of Ukraine, we expect further support measures for the banking sector to help borrowers and/or encourage the introduction of new loans by other emerging European authorities, including Bulgaria and Croatia, in the short term. Widespread action could also trigger an initiative by the European Central Bank (ECB) to harmonize guidelines for the moratorium.
Panama’s action plan to exit the Financial Action Task Force (FATF) gray list.
After June 2019 – when Panama was included in the list of countries under enhanced surveillance (informally called the “grey list”) of the FATF – some correspondent banks decided to cut their ties with the country. Panamanian authorities have put in place measures to move away from the list, aligning themselves with 11 of the 15 FATF recommendations. However, the organization deemed Panama’s measures insufficient and urged it to comply with all recommendations by October 2022 – or it could be included in the list of high-risk jurisdictions (the “blacklist”) . We expect regulators and legislators in the country to establish a plan to comply with FATF requirements.
High household debt is expected to give way to increased business demand in the Gulf.
Since 2020, household loans have exceeded business loans in more than half of the countries in the Middle East and North Africa (MENA). This gap was most pronounced in Saudi Arabia, where household loans grew three times faster than business loans. Household loans have grown 27% y/y on average since the start of 2020, compared to just 8% y/y growth for corporate loans. This was partly due to favorable interest rates for borrowers and support programs for homebuyers, but also due to weak demand from businesses, which withheld new investment and paid off existing debt. We expect corporate lending to grow relatively stronger this year across the region as external borrowing costs and investor sentiment deteriorate, prompting banks to return to domestic bank borrowing. This is particularly likely in the Gulf, where investment spending is expected to increase.
Release of end-2021 data to reveal the state of asset quality in Mozambique, after forbearance measures expire.
Mozambique is expected to release its December 2021 Financial Stability Review, which is expected to reveal the first impact on asset quality after forbearance measures end in June 2021. So far, asset quality risks were contained through forbearance measures, reflected by the NPL ratio, which stood at 9.9% – down from 11.9% at the start of the pandemic. IHS Markit predicts that the NPL ratio will begin to gradually increase in 2022 as some of the restructured loans materialize in NPL amid rising inflation due to the Russian-Ukrainian conflict. In April, the Banco de Moçambique raised its policy rate by 200 basis points, signaling a tighter monetary policy to contain inflation, which is likely to further affect the debt service capacity of the borrower and to keep loan growth below its potential. IHS Markit forecasts 2.4% year-on-year loan growth in 2022 for Mozambique, compared to loan growth of 16.3% year-on-year and 0.7% year-on-year in 2020 and 2021, respectively. The increase in loan growth will be primarily due to the start-up of the Coral-South floating liquefied natural gas project in the second half of 2022.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.