|David Petitcolin, Emerging Markets Strategist at RBS|
Britain and the United States are ranked last in the RBS study, while Hungary, South Africa and Israel are the lowest ranking emerging economies. Their lowly position may have important implications for the effectiveness of monetary policy. With limited space to expand credit, further monetary easing is unlikely to foster greater private-sector borrowing and thus generate a credit-led recovery.
The study calculates the potential credit expansion within an economy and produces a composite score based on its banks' loan-to-deposit ratio, the size of government debt relative to economic output and the current stock of private-sector credit.
For example in the United States, existing levels of private debt are already equivalent to 190 per cent of GDP, its bank loans are equivalent to 109 per cent of deposits limiting available funding and government debt is second only to that of Japan (at 100 per cent of GDP). High public debt matters because it raises the likelihood of eventual spending cuts and tax increases, which would chill the economy and sap consumers' appetite for credit.
Most emerging economies tightened monetary policy until the beginning of this year over inflation fears. That has slowed the pace of credit expansion a little, but banks are still extending debt to households and business at a healthy rate.
Unsurprisingly, private lending is expanding fastest in markets with the lowest loan penetration. On that basis, the likes of Indonesia, the Philippines, Mexico and Columbia all with stocks of debt under 40 percent of GDP could soon outstrip countries such as Thailand, where credit grew by 15 per cent last year, but where debt-to-GDP now stands at 124 per cent.
Taiwan, India and the Philippines do best on the second indicator available bank funding for credit while banks in Korea, Romania and Hungary have more stretched loan/deposit ratios. In terms of public debt, Indonesia, Chile and Russia have the lowest debt positions, but the Indian, South African and Thai governments have higher debt levels and therefore appear more likely to adopt austerity measures that could diminish demand for credit.
While our model helps identify which countries have greatest scope to expand credit, it does not necessarily imply that credit will expand at that rate. It only estimates the space for further borrowing. The vital missing ingredient is confidence. Eastern European countries such as the Czech Republic score better than Asian economies such as Malaysia but actual private sector growth there has been weak, reflecting weak appetite for credit. Indeed, other factors, such as the euro zone's troubles, will clearly remain a major influence on consumers' and businesses' appetite for credit.
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