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Low Macro-Prudential Risk in Record Number of Markets; Bottom of Global Credit Growth Cycle

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Wednesday, March 7, 2018 / 09:45 AM / Fitch Ratings 

Fitch Ratings' updated macro-prudential risk indicators (MPI scores) suggest low vulnerability to systemic stress in a record high number of markets. This reflects widespread and sustained low real credit growth, the key determinant of MPI scores. The global median for real credit growth was 2.9% in 2017, in line with 3.0% growth in 2016 and a record low since the global financial crisis of 2008, says Fitch in its latest Macro-Prudential Risk Monitor.
 

MPI scores in this report are updated to incorporate 2017 data. Five markets revert to MPI 1, indicating low vulnerability to systemic risk as measured by credit growth and appreciation in asset markets and/or the real exchange rate. These are Cyprus, Mongolia, Paraguay, Turkey, and Venezuela. There are no markets with a deteriorating MPI score. The proportion of markets scoring MPI 1 stands at 80% - the highest level since Fitch began this report in 2005, and up from 76% in August 2017.
 

Ethiopia is now the only Emerging Market (EM) scoring MPI 3, indicating high vulnerability to systemic risk, as Turkey and Venezuela revert to MPI 1. For Venezuela, the improving score is partially attributable to the distortionary effects of sustained hyperinflation. Ethiopia is one of 14 EMs where real credit growth exceeded 15% in two successive years in 2014-2017 (the trigger for an MPI 2 or below for EMs), down from 18 in the previous report. This is 18% of all EMs included in the report.
 

In the developed world, Hong Kong and Macao remain on MPI 3, unchanged from the previous report. These are two of the nine Developed Markets (DMs) for which credit/GDP is more than 5pp above trend in a single year between 2015 and 2017 (the trigger for an MPI 2 or below for DMs), one lower than in the previous report. This is 23% of all DMs included in the report.
 

Bank Viability Rating (VR) changes have led to four Banking System Indicator (BSI) changes: El Salvador (to 'b' from 'ccc'), Ireland (to 'bbb' from 'bb') and Ukraine (to 'b' from 'ccc') have improved; and Venezuela has weakened to 'cc' from 'ccc'. Fitch has assigned a new BSI for Mongolia ('b').
 

The global median for real credit growth has decelerated sharply over the last two years, from 5.6% in 2015; growth has converged at low levels across the majority of markets. In 2017, only two of 76 EMs recorded credit growth above 15%, and only seven of 39 DMs saw growth above 5%. However, the strong global economic growth recovery, despite gradual monetary policy normalisation, suggests that the stabilisation signals an end to the downturn in the global credit cycle.
 

EM median credit growth was 2.9% in 2017, unchanged from the previous year and bringing an end to the slowdown that materialised in 2016. Prior to this, EMs had accounted for much of global credit expansion following the global financial crisis. The stabilisation is supported by an increase in domestic demand, steady commodity prices and a pick-up in world trade.
 

For DMs, median growth was 2.6% in 2017, slightly down from 3.0% in 2016 and the fourth consecutive year of modest expansion in the range of 2%-3%. However, the expected increase in investment and easing in bank lending standards in many markets indicate that this is a bottoming-out of the credit cycle.
 

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The strongest median credit growth was recorded in EM Asia for the second consecutive year, at 8.0% in 2017. Both DM Europe and EM Europe saw a mild acceleration to 1.5% and 2.9% respectively, up from 1.1% and 1.3% in 2016. Latin America also saw a mild acceleration to 3.8%, while credit performance was weakest in Middle East and Africa at 1.0%.
 

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 (RER), the latter sometimes associated with asset market bubbles. The focus is therefore on only one potential source of banking system stress.
 

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