Credit growth in China, Brazil and Turkey doesn’t only risk spurring a hangover in bad debt — it also signals a banking crisis is on the horizon, according to the Bank for International Settlements.
A ratio of credit to gross domestic product, a measure of how much private-sector credit has deviated from its long-term trend, stands at 25.4 percent in China, BIS said in a report on Sunday. That’s the highest of any major economy and compares with 16.6 percent in Turkey and 15.7 percent in Brazil.
“Early warning indicators of banking stress pointed to risks arising from strong credit growth,” according to the bank. Historically, a country with a ratio above a 10 percent threshold has a two-thirds chance of “serious banking strains” occurring within three years, BIS said.
The world’s biggest developing nations were quick to recover from the 2008 global financial crisis, financing expansion in a borrowing spree, and now as growth subsides, lenders are grappling with mounting bad loans. China’s shock devaluation of the yuan last month roiled global markets on concern a slowdown in the world’s second-largest economy was deepening.
The risk in China is a legacy of a record 17.6 trillion-yuan ($2.8 trillion) lending boom unleashed by former Premier Wen Jiabao in 2009. Non-performing loans in the country in the first quarter climbed by the most since that data became available in 2004, reaching 982.5 billion yuan. That’s almost the size of Vietnam’s economy.
Like China, Indonesia, Singapore and Thailand also have credit-to-GDP ratios that exceed 10 percent and are therefore vulnerable to banking strains, the BIS report shows.
The biggest banks in Brazil, which is in the midst of the worst contraction in a quarter century, are boosting provisions to cover their bad loans. Banco do Brasil SA, Latin America’s largest bank by assets, last month increased money set aside for bad loans by 21 percent.
The state-owned bank and Banco Bradesco SA were among 13 financial-services firms in Brazil that had their global scale ratings lowered by Standard & Poor’s last week after the nation’s credit grade was cut to junk.
“Estimated debt service ratios also pointed to continuing risks,” BIS said in the report. For example, “households and firms in Brazil, China and Turkey spent significantly more on servicing their debt than in the past.”