Emerging countries and their markets at risk!

The credit conditions are to be continued to be dominated by the Post pandemic and it’s after math too. As the vaccines are coming out in several countries, it is expected to have a high degree of uncertainty regarding the coronavirus pandemic’s evolution and its economic effects. There is also a hope, that by the midyear of 2021, there will be a widespread of the immunization and this will help make a pathway for the return of the social and economic activities back to normal levels.

Central banks are the ones which are most likely to keep exceptionally accommodative monetary policy, especially the ones in developed markets. And for the emerging markets, considering some key elements, this should translate into much stronger economic recovery and favorable financing conditions. However, the risks related to vaccine distribution and spikes in the number of COVID-19 cases remain acute for emerging markets, and this may interrupt the economic rebounds and increase risks for their banking arrangements.

Argentina, Brazil, Chile, China, Colombia, India, Indonesia, Malaysia, Mexico, the Philippines, Russia, Saudi Arabia, South Africa, Thailand and Turkey are the 15 banking systems among the largest emerging markets which was analyzed by Dr. Mohamed Damak, Senior Director and Sector Lead, Financial Services Division, S&P Global Ratings. He gave us few main points or common risks that their banking system might face in 2021. The predictable decline in asset-quality indicated as a regulatory-forbearance events are lifted; the volatile geopolitical environments and, in some cases, domestic-policy uncertainty; and For a few banks in EMs, the susceptibility to abrupt movements in capital flows can be seen, these were few of the issues.

He also said that the banking systems might face few sources of risks especially in the emerging countries like the deterioration in asset quality, Geopolitical and domestic policy uncertainty and the vulnerability to abrupt changes in the investor sentiments. 

He said that the exposures to small and medium-sized enterprises (SMEs) will drive asset-quality deterioration, particularly for countries such as Turkey, South Africa, India, China, Indonesia and Thailand. Real estate being another source of risk for the EM banks. Even though the immediate risks appear manageable but the uncertainty and probable long-term impacts from the pandemic might bring operational changes to the profitable real-estate segment via shifts in customer preferences in the direction of online shopping, more flexible work preparations and cost-cutting procedures from consumer-driven industries. But in the end, high domestic leverage in some countries, along with still-healing job markets, will also subsidize to the asset-quality decline of the EM banks.

In his views, vulnerability to a sudden change in investor sentiment remains high. Other countries in their sample either have partial external debt or are in a net-external-asset position. And the recent changes in the policies direction might bring reassurances to the investors.