Last week I read a rather disturbing story in the financial news. According to the article Moody’s, the rating agency, downgraded Singapore’s banking sector from “stable” to “negative.” Singapore? Last September I wrote about problems with banks in several emerging markets, but Singapore was not on the list. It has not received a downgrade since the financial crisis. Its four banks are rated Aa1 some of the highest-rated banks in the world. My first thought was how did this happen and what does it indicate for other emerging markets?
Singapore banks, like every other private bank, want to increase profits. Like many other international banks this meant increasing loans to higher-risk emerging markets. Singapore’s banks leant mostly to borrowers in Southeast Asia. They were successful in doubling their profits, but also their exposure. The region now represents the source of about 40% of those profits. But the region also represents a disproportionate amount of the risk. Last year borrowers outside Singapore were the source of 77% of Singapore banks’ nonperforming loans. What is more disconcerting is that the banking systems in other Southeast Asian countries, like Thailand or Indonesia, seem healthy. It might be time to change that assessment.
What may not be so healthy is the South Korean economy. Korea is caught in a very bad place. It is very difficult for an economy heavily based on exports to grow if its main market, China, is slowing, while its main competitor, Japan, has depreciated its currency. The result is predictable. Whole swaths of its economy including shipping, ship building, construction and real estate are having major issues. The bond market has already experienced a number of bankruptcies and its nonperforming loans have been rising.
Like China, the rate of growth for the Indian economy has been declining since 2010. The predictable effect is a rise in nonperforming loans, up to 3.5% at the end of 2012. India is also like many other countries in another way. The published nonperforming loan number masks the real problem. Rather than push a borrower into default, it looks much better on a bank's balance sheet if the loan is restructured. Theoretically a restructured loan is supposed to be good for the overall economy by providing a bit of patience for companies going through a rough patch. Many don't make it through.
Read the rest of the article here: http://seekingalpha.com/article/1604512-bad-debt-central-impediment-to-emerging-market-growth