LONDON, June 24 (Reuters) – Loose global monetary conditions
are stoking credit and asset price booms in some emerging
markets that could lead to a new financial crisis, the Bank for
International Settlements warned on Sunday.
Such a boom-and-bust cycle might have severe global
repercussions, not least due to the increased weight of emerging
markets in the world economy and in investment portfolios, the
BIS said in its annual report.
It urged central banks to pay more attention to the global
spillovers from their domestic policies, an echo of complaints
from Brazil and others that the ultra-loose monetary stance in
older economies has touched off large, destabilising flows of
capital into emerging markets in search of higher yields.
“This creates risks of rising financial imbalances similar
to those seen in advanced economies in the years immediately
preceding the crisis,” the BIS said.
Credit growth that is well above its long-term trend in
relation to economic growth opens up a gap that has often
presaged serious financial distress when it has exceeded 6
percent in the past, the report said.
Thailand and Turkey have credit gaps of 15 percent or more,
while Brazil and Indonesia are also in the danger zone above 6
percent, according to the BIS.
Real credit growth in Argentina and China has also far
outpaced gross domestic product (GDP) growth, but their credit
gaps are well below the 6 percent threshold.
Asset prices also look increasingly frothy in many emerging
economies, the BIS said. In some local Brazilian markets, real
estate prices have almost doubled since the subprime crisis.
Prices in some Chinese cities have risen even faster.
High debt loads could be a problem, too. The fraction of GDP
that households and firms in Brazil, China, India and Turkey are
allocating to debt service stands at its highest level since the
late 1990s, or close to it, even though interest rates are low.
The BIS acknowledged that emerging market central banks are
nursing a policy headache: raising interest rates may attract
even more capital inflows and thus fuel domestic credit growth.
As a result, it said, monetary policy in emerging markets
may be systematically too loose.
“One way out is to accompany higher interest rates with
macroprudential measures such as higher capital ratios or
tighter loan-to-value ratios. And, even if these tools fail to
slow credit growth significantly, they should at least reinforce
the financial system against the consequences of a credit bust.”
The BIS also urged emerging markets to wean themselves off
exports because prospects for the world economy are poor: only
two out of 28 representative economies can expect their trading
partners to grow faster in 2011-2015 than in 2003-2007.
For example, around one fifth of Thai exports goes to
countries where growth is projected to drop by no less than 2
percentage points in 2011-15.
Russia and India are also vulnerable to the slower growth
expected in their trading partners – Ukraine and Turkey for
Russia, and the Middle East for India, the BIS said.
