|22 January, 2020

Banks in 2020: Three looming risks in emerging markets

S&P analysed 15 banking systems among largest emerging markets economies

Various currency notes from Saudi, UAE, Kuwait and Oman. Image for illustrative purpose.

Various currency notes from Saudi, UAE, Kuwait and Oman. Image for illustrative purpose.

Banks in emerging markets will face three risks this year, though global economic conditions should remain accommodative, S&P Global said.

Emerging markets also face challenges related to volatility in commodity prices, global trade and geopolitical tensions, uncertainty in domestic policies as well as currency pressures.

Mohamed Damak, credit analyst at S&P Global Ratings, said: “Within this context, we have analysed banking systems among the largest emerging market economies and identified three main common risks that they will face in 2020. These are related to the highly volatile geopolitical environment and – for some – domestic policy uncertainty, marginal deterioration in asset-quality indicators, and vulnerability to abrupt movements in capital flows.” 

But when it comes to geopolitical uncertainty, S&P sees that both the US and Iran are keen to avoid direct conflict as it would be destabilizing for all the region at all fronts, including US-Gulf allies.

As for the second risk, which is marginal deterioration in asset-quality indicators, the ratings agency forecasts that non-performing loan formation and risk cost will stabilize or increase marginally this year.

While vulnerability to sudden changes in investor sentiment poses a key risk to emerging markets’ banks, S&P expects that access to global capital markets will be retained by emerging markets’ banks with sound credit fundamentals.

“In fact, this has already started, with some EMs experiencing an increase in capital flows (approximated by net non-resident purchases of EM stocks and bonds) in 2019 compared with 2018,” the report said.

On the third risk, S&P’s Damak said: "We believe global financial conditions should remain accommodative this year for emerging market banks with good credit fundamentals, especially given the more than $10 trillion of debt worldwide with negative yields.”

The ratings agency lowered its estimates of a US recession in 2021 to 25 to 30 percent from 30 to 35 percent earlier due ‘to resilient consumer spending’, though it said that concerns over weaker Chinese and European growth persist.

It also expects one-third of the 15 emerging economies to experience relatively high economic growth, including India, the Philippines, and Malaysia.

“However, growth remains below trend for most Asian EMs due in part to the ongoing downturn in the trade and manufacturing cycle,” S&P said.

The report analyzed 15 banking systems among the largest emerging markets economies: Argentina, Brazil, Chile, China, Colombia, India, Indonesia, Malaysia, Mexico, the Philippines, Russia, Saudi Arabia, South Africa, Thailand, and Turkey.

(Writing by Nada Al Rifai nada.rifai@refinitiv.com , edited by Seban Scaria)

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

© ZAWYA 2020

More From Business