Asia eyes $40tr credit growth over 10 years

Dubai: Asian economies will need an increase of more than $40 trillion (Dh146.8 trillion) in credit in the next 10 years to meet forecast economic growth.

This is almost half of the $103 trillion in credit expansion that global economies will need over the same period to support projected growth, a new study has shown.

The doubling of credit can be achieved without increasing the risk of another major crisis, according to "More Credit with Fewer Crises: Responsibly Meeting the World's Growing Demand for Credit," a report released by the World Economic Forum (WEF) in collaboration with McKinsey and Company.

The study develops a detailed global credit model using historical credit volumes and forecasting potential credit demand to 2020 in 79 countries, representing 99 per cent of world credit volume.

The study applies a sustainability methodology to the projected credit demand, using newly developed metrics to answer the following two questions: Will credit growth be sufficient to meet demand? Is there a risk of future credit crises and, if so, where?

The report finds that meeting credit demand will be challenging. Globally, financial protectionism may constrain cross-border financing, a key to the provision of sufficient credit in the next decade, as global imbalances persist.

In addition, the regions will experience varying issues: Asia will face the challenge of meeting the high credit demand growth of $40 trillion with less developed financial systems and capital markets.

Retained earnings

In the European Union, a further $13 trillion of credit in the form of bank lending will be needed.

To supply this, banks will require additional capital which, after retained earnings, could lead to a capital shortfall of $2 trillion. Analysis shows that the US would continue to need to draw on global savings, potentially by up to $3.8 trillion in 2020, in order to fund its credit needs, unless there is a marked increase in US domestic savings rates.

"Leaders in the private and public sectors must take decisive actions to avoid contributing to credit hot spots and coldspots, while still meeting the $100 trillion of credit demanded to sustain economic growth over the next 10 years," GianCarlo Bruno, director of financial services industries at WEF, said.

Credit hot spots

Despite widespread deleveraging, a number of "hot spots", or segments where credit levels grow in excess of sustainable levels, will persist, while new ones emerge. By 2020, these will include retail credit segments in countries representing almost half of the global gross domestic product, the study shows.

By contrast, government credit hot spots are projected for a much smaller set of countries, between them representing 13 per cent to 14 per cent of world GDP.

In wholesale credit, Asia and Western Europe will be the main drivers of hot spots in 2020. Credit growth is also uneven among regions. China witnessed a credit surge at the start of this year, following reports the central bank cut the 2011 lending target for banks by 10 per cent.

There is growing concern that a tide of bank loans on the back of rapid capital inflows is complicating the government's efforts to rein in inflation.

Global economic optimism is back to the highs of April 2010, helped by monetary policy, which is seen as the most expansionary since July 2004, according to a survey of 287 fund managers with a total of $759 billion of assets under management conducted by Bank of America Merrill Lynch.

A net 72 per cent of the respondents expect higher inflation in the next 12 months, the highest in almost six years, yet views on the first US Federal Reserve rate rise continue to be pushed back well into 2012. This points to snowballing economic growth, leading to a very high demand for bank credit.

The WEF-McKinsey report found the projection in credit demand could be safely met, but financial institutions, regulators and policymakers needed more robust indicators of unsustainable lending, contagion risk and credit shortages — and better ways to ensure credit promoted development.

"Given the huge financing needs of both developed and developing markets, it's a crucial issue for policymakers and the fin-ancial industry to tackle globally," Deven Sharma, president at rating agency Standard and Poor's, said.

Charles Roxburgh, director of McKinsey Global Institute, said: "The banking system has a critical role in supporting future economic growth and this report highlights ways in which it can do so with reduced risk of crises. In particular, there is a pressing need for continued development of capital markets in developing economies to support their continued economic success."

Sustainable levels

The WEF-McKinsey report makes eight recommendations for financial institutions, regulators and policymakers to follow to ensure sustainable credit levels for the future:

1. Integrate the concepts of sustainable credit into the regulatory agenda.

2. Create standardised government accounting practices to increase transparency and accurately assess sovereign finances.

3. Encourage responsible borrowing through financial education.

4. Encourage financing of local "coldspots" through targeted mechanisms.

5. Task a single agency with monitoring global credit levels and system-wide credit sustainability.

6. Align banks' risk appetite with sustainable credit criteria.

7. Drive innovation by financial institutions, developing new mechanisms that can safely meet future global credit needs.

8. Establish goals for efficient and deep capital markets by 2020 in developing economies.