Banking systems in emerging markets will face some key common risks in 2019 amid gradually slowing global growth and more expensive global liquidity, says S&P Global Ratings in a report published today on RatingsDirect (“Banks In Emerging Markets: 10 Countries, Three Main Risks”). “These risks relate to weakening asset quality, the vulnerability of some of them to external capital flows, and finally the correlation between these countries from an investor’s point of view,” said S&P Global Ratings credit analyst Mohamed Damak.
As they continue to operate in less supportive economic environments, and as some of them adopt IFRS 9 reporting, we believe that most emerging market banking systems will show at best stable asset quality indicators or a slight deterioration. This could be the case, for example, in China due to higher charge-offs, and in Mexico and Gulf Cooperation Council countries. At worst, banks could see a significant deterioration, the effects of which we started to observe in the last two quarters of 2018, for example in Turkey.
Risks from external debt are particularly relevant for Turkey and Qatar, the report says. The third common risk is related to investors’ perception of the risks within these countries. “Our study found that investors have accelerated their exit from several countries. The higher returns in more mature markets and homegrown challenges in these emerging markets have certainly influenced investor decisions to exit,” said Mr. Damak.
Furthermore, the correlation between these countries is picking up, although it remains significantly below what we observed during the global financial crisis and even during the announcement of the change in the monetary policy stance of the Fed. “Investors are differentiating less between these countries. Keeping a close eye on correlation is therefore important to see the future direction of external flows,” Mr. Damak said. The report covers the banking systems of 10 of the largest emerging markets: Argentina, Brazil, China, India, Indonesia, Mexico, Qatar, Saudi Arabia, South Africa, and Turkey. It also analyzes key country-specific assumptions and risks for these countries.