KUALA LUMPUR, Jan 19 — Moody’s Investors Service has projected that the average real gross domestic product (GDP) growth rate for G-20 emerging markets (EM) economies would decline to 3.1 per cent this year, the lowest in more than a decade, from 3.2 per cent in 2022.
It said the slower growth in EM economies would be attributable to the decline in global demand, and this would lead to weaker loan demand and more loan defaults.
“Key risks to economic growth include China’s economic slowdown, a moderation of global demand, particularly from the United States and Europe, as well as softening of commodity prices,” it said in its Emerging Market Banks: Key Credit Drivers for 2023 report today.
Moody’s said that slower economic growth would be one of three key credit drivers — the other two being high inflation and currency depreciation — which would raise asset risks for EM banks.
In terms of inflation, the rating agency said the inflation rate for EM countries will decline in 2023 but would still remain high.
“High-interest rates will support net interest margins (NIMs) for banks but will also lead to increases in loan-loss provisions as non-performing loans grow.
“Among banks in G-20 EM countries, those in Saudi Arabia and South Africa will see the biggest increases in NIMs, while loan-loss provisions will grow the most in Brazil and Turkey, though not significantly enough to outweigh NIM gains,” it said.
As for currencies, Moody’s said EM currencies have depreciated as a result of a strong US dollar, while the financing conditions in EMs would remain tight.
“Depreciation of EM currencies will raise asset risks for banks in highly dollarized countries.
“Regulatory capital may also come under pressure for banks with large net foreign-currency liabilities,” it said.
However, it said that the impact of tight financing conditions would vary across EM countries, and banks in large EM countries with deep and developed domestic debt capital markets would be better positioned to cope.
Apart from the three key credit drivers, the rating agency said that social and political risks would remain high in some EM countries.
“Military conflicts, particularly in the Commonwealth of Independent States (CIS) region and Africa, or social unrest in some EM countries could significantly curtail access to funding for banks and hurt their asset quality.
“Although China started easing policies to curb coronavirus infections at the end of 2022, they will continue to weigh on credit growth in the country and raise asset risk for banks,” it added.
Moody’s report analysed key credit drivers affecting asset risks for banks in the EM countries, namely China, India, and countries in Southeast Asia, the Gulf Cooperation Council region, CIS region, Africa, and Latin America.