Global credit growth in 2017 is likely to stabilise following a slowdown in 2016, but remains at a record low since the global financial crisis of 2008, says Fitch Ratings in its latest Macro-Prudential Risk Monitor. Consequently, macro-prudential risk indicators (MPI scores) continue to point towards reduced vulnerability to systemic stress in the majority of markets.
Fitch estimates that global median real credit growth will be 2.5% in 2017, broadly in line with 2.8% growth in 2016. The stabilisation is driven by credit performance in emerging markets (EMs), particularly Middle East and Africa (MEA) and Latin America, which accounted for the sharp deceleration in global credit growth from 5.6% in 2015. This reflects the recovery in EM demand, underpinned by the progress commodity producers have made following the 2014-2015 terms of trade shock.
Subdued credit growth is becoming more widespread. Fitch does not expect any markets to have real credit growth over 15% in 2017, with 42% of EMs and 64% of developed markets (DMs) forecast to have low but positive credit growth of up to 5% – the highest concentration since Fitch began this report series in 2005.
The 2016 slowdown was driven by a marked deceleration to median credit growth of 2.9% in EMs, well below average post-global financial crisis growth of 8.4% during 2010-2015.
For MEA and Latin America, median credit growth slowed to 2.8% and 2.9% respectively, while EM Europe’s weak credit performance continued at 1.3%. EM Asia saw the highest credit growth at 9.9%, but this was moderate relative to 2010-2012 performance in the immediate aftermath of the global financial crisis and below double-digits for half the markets in the region. Modest credit growth continued in DMs at just above 2% for the third consecutive year, in line with the economic recovery.
MPI scores are updated to reflect outturns for 2016 and coverage has been expanded to include the Maldives (MPI 1), the sovereign rating of which has been newly assigned this year. As Fitch’s estimates from January 2017 were broadly in line with credit growth outturns, there are few changes.
The number of EMs scoring MPI 3, indicating high vulnerability to systemic risk is unchanged at 3. These are Ethiopia, Turkey and Venezuela. Including these, there are 18 EMs for whom real credit growth exceeded 15% in two successive years in 2013-2016 (the trigger for an MPI 2 or above for EMs), up from 17 in the previous report. This is 24% of all EMs included in the report.
In the developed world, Hong Kong and Macao remain on MPI 3, also unchanged from the previous report. These are two of the 10 DMs for which credit/GDP is more than 5pp above trend in a single year between 2014 and 2016 (the trigger for an MPI 2 or above for DMs), up from eight in the previous report; this is 26% of all DMs included in the report.
The proportion of markets scoring MPI 1, indicating low vulnerability to systemic risk, is 76%; this is slightly down from the record high of 78% in January 2017 as Cyprus, Egypt and Switzerland move to MPI 2. However, the placid outlook for credit growth suggests this ratio will increase again in the next report, due in early 2018. At that time, the reference period for calculating MPI scores will move forward to include updated estimates for 2017.
Bank Viability Rating (VR) changes have led to four Banking System Indicator (BSI) changes: El Salvador (to ‘ccc’ from ‘b’), South Africa (to ‘bb’ from ‘bbb’) and Turkey (to ‘bb’ from ‘bbb’) have weakened; and Greece has improved (to ‘ccc’ from ‘f’). Fitch has withdrawn the BSI indicator for Finland on insufficient coverage.
This report updates the systemic risk indicators Fitch has published since 2005. It aims to identify the build-up of potential stress in banking systems due to a specific set of circumstances: rapid credit growth accompanied by bubbles in housing or equity markets, or an appreciated real exchange rate, the latter sometimes associated with asset market bubbles. The focus is therefore on only one potential source of banking system stress.