Cross-border lending to emerging markets fell in the second quarter for the first time since 2016, mainly driven by a decline of $43 billion in Latin America and the Caribbean, the Bank for International Settlements (BIS) said on Tuesday. This is potentially bad news for Turkish banks which heavily rely on foreign credit markets to expand their balance sheets and facilitate foreign trade.
The BIS, a forum for the world’s central banks, said in a quarterly report analysing banking statistics that the contraction in emerging markets and developing economies (EMDEs) had been relatively widespread.
Claims — transactions between banks and counterparties across borders — declined year-on-year for three of four regions, resulting in negative growth for EMDEs as a whole for the first time since 2016, the BIS report found.
“One exception to this general picture is the Africa and Middle East region: the annual growth in cross-border claims on its residents has remained positive (+4% yoy), extending the trend observed since 2014,” the report said.
It is not clear whether Turkey with no oil and gas income would benefit from easy credit to MENA. Yesterday, Turkey Wealth Fund dropped the idea of a Eurobond with a 5 year maturity. According to PA Turkey conversations with treasury departments, there was difficulty pricing the issue, with different shops offering spreads from 30 basis points over Treasuries to 200 basis points.
The economic impact of the coronavirus pandemic has roiled global markets and hit many emerging economies particularly hard. Latin America is the worst-affected region, with about 27% of total COVID-19 cases, followed by Asia, North America and Europe, according to a Reuters analysis.
On a global level, banks’ cross-border claims shrunk by $1.1 trillion in the second quarter compared with the first.
Year-on-year growth in claims halved to 5% at the end of June from 10% at the end of March. A decline in interbank lending drove the overall contraction.
As of August, banks’ long-term FX debt roll-over ratio hovered around 80%. This is fine when the economy is in stagnation and neither the business community, nor consumers demand FX loans. Yet, if Turkey were to grow 5% in 2021, as both the government and IMF predict, it will need ample foreign borrowing. If cross-border lending to EM continues to decline, a dearth of external funding could choke an incipient recovery.
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