Bank lending in emerging economies deteriorated in the first quarter of 2014, reflecting “mainly weaker economic performance,” the Institute of International Finance reported Wednesday. The IIF’s quarterly composite index of lending — based on questions put to senior loan and chief credit officers in Latin America, Asia, Europe, Africa and the Middle East — dropped to its lowest level since the end of 2011. Domestic loan demand in those countries softened, the IIF said, and “weak import demand and softer exports dampened the demand for trade finance.” In addition, levels of nonperforming loans rose.
Consumer and residential real estate lending demand slowed markedly in many regions, especially the emerging market countries in Europe, Latin America and parts of Asia. That could be a poor sign for U.S. companies’ profit outlook, due to their increasing reliance on emerging market sales powered by the buying appetites of consumers.
Trade finance, meanwhile, presented somewhat of a mixed picture, with demand slowing in parts of Asia, Latin America and Sub-Saharan Africa, reflecting “softer exports and weak investment activity.” But trade finance demand picked up among businesses in the Middle East and North Africa, the IIF said.
Loan and credit officers are also seeing effects of the increase in private-sector debt that has occurred the past few years. Many banks across emerging markets are tightening credit standards. In addition, loan quality declined in parts of Europe, Latin America and the emerging market nations of Asia, said the IIF. Credit officers in those regions expect further deterioration in asset quality this quarter.
If worsening lending outlooks in emerging markets foreshadow poor economic performance, there could be a knock-on effect in the United States. “Global developments will primarily determine whether [U.S. economic] growth largely holds up or weakens in the second half [of 2014],” according to the latest economic report by David Levy, chairman of The Jerome Levy Forecasting Center.
While the domestic sources of U.S. companies’ profits are relatively stable (consumer spending rose significantly in March), financial instability or other economic problems in foreign economies could cause an increase in foreign savings, Levy said. “Foreign saving remains the biggest wild card; it will probably trend moderately down (a boost to proﬁts) unless conditions in the emerging markets notably worsen or the tepid recovery in Europe ends.”
Among some of the regional conditions cited in the IIF report were the following:
Emerging Europe. “Loan demand by businesses continued to increase robustly and the decline in commercial real estate loan demand moderated. On the other hand, demand for consumer and housing loans plunged, especially amid tight credit standards for such loans.”
Latin America. “Corporate loan demand continued to decline and commercial real estate loan demand fell again after recovering in the [third quarter]. Loan demand by householders maintained its downward trends, suggesting that consumer spending remains soft in the region overall … The [supply] of trade finance [fell], probably due to tight funding conditions and risk aversion among banks.”
Emerging Asia. “Compared to other regions, [emerging markets in] Asia continued to have the most aggressive tightening in credit standards. … With consumer spending recovering in the region, consumer loan demand continued to increase, albeit at a slower pace.”
Middle East/North Africa. “Loan demand for commercial real estate began rising and [demand] for consumer and housing loans accelerated further. On the other hand, business loan demand slowed. … Meanwhile, the demand for trade ﬁnance remained robust … and the supply of trade ﬁnance continued to increase.”
One-hundred twenty-five banks in emerging markets participated in the IIF survey.
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