Wednesday 08 May 2024
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This article first appeared in The Edge Financial Daily on December 7, 2018

KUALA LUMPUR: The economic growth outlook for emerging markets is more cloudy than that of advanced economies in 2019, Moody’s Investors Service said yesterday.

“Growth will still be solid in advanced economies in 2019 (2.9% in G20 [Group of 20] nations in 2019), though the growth outlook for emerging markets is more cloudy, with tightening monetary policy, rising trade protectionism and slower demand from China, which may have spillover effects on banks,” its associate managing director Andrea Usai said in a statement.

“[But] the generally supportive operating environment overall will help banks to preserve the stronger capitalisation achieved in recent years,” he added.

In its report “Banks — Global 2019 Outlook” released yesterday, Moody’s said geopolitical and domestic risks pose the greatest source of uncertainty and risk in 2019, with US-China tensions spreading far beyond trade disputes.

“In addition, the risks of a ‘no-deal’ Brexit scenario under which the UK banks’ credit fundamentals would weaken, have increased.

“Meanwhile, domestic and political risks will continue to weigh on the outlooks for Argentina, Brazil, Italy, and Turkey, with credit-negative implications for their banking systems,” it added.

On the other hand, Moody’s said, rising interest rates will help improve profitability, providing some boost to banks’ net interest margins, as already seen in the US.

“Nonetheless, profitability will continue to be a credit weakness for many banking systems, particularly in Europe, with still-low interest rates and elevated cost bases keeping returns on assets and capital modest.

“As monetary policy gradually normalises in advanced economies, particularly the US, volatility will return to financial markets, a challenge for many banks but also an opportunity for firms with large trading activities,” Moody’s noted.

The global rating agency said emerging-market economies will remain vulnerable to spillover effects from monetary policy normalisation in advanced economies because of a likely further tightening of global liquidity, combined with currency pressures.

“Countries with large current account deficits, low reserves, high external debt repayments and substantial foreign-currency government debt are most exposed,” it said.

“Banks in emerging Asian economies will face slower economic growth in the region, tightening dollar liquidity and rising interest rates, though they have solid buffers protecting their credit quality. The key concern is the escalating US-China trade dispute and spillover effects on financial markets,” it added.

Moody’s is expecting the US Federal Reserve to continue raising interest rates, with the upper bound of its target range peaking at 3.5% by the end of 2019.

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