Malaysia, RP economies to undergo stress: S&P

Malaysia, RP economies to undergo stress: S&P

SYDNEY (Reuters): Standard and Poor's Corp. said yesterday the financial systems of Malaysia and the Philippines were likely to undergo significant stress over the near term because of excess credit growth in recent years.

In a global report on the impact of financial system stress on sovereign creditworthiness, S&P said also that Hong Kong bank earnings and asset quality were likely to come under pressure given the rapid loan growth during 1996-1997 and the erosion of the net external creditor position of the financial sector.

The ratings agency said these expectations were based on analysis of the leading indicators of stress in financial systems.

Most Latin American and Eastern European financial sectors were unlikely to experience stress in the near term due to a manageable level of private sector indebtedness and low rates of credit growth and asset price inflation in recent years.

However, S&P said Eastern European financial systems ran a higher risk of excessive credit growth in the future due to nascent regulatory infrastructures and little experience with financial crises.

"Experience with fragile financial sectors has shown that banking system soundness is essential to a country's macroeconomic stability, effective demand management and sustained economic growth," the S&P report said.

"Because they are a source of direct and indirect costs to the government, privately and publicly owned banks are contingent liabilities of the government and an integral part of sovereign risk analysis," it said.

S&P said outside of Asia, potential bank systemic stress could be brewing in Egypt and Lebanon. Both countries had registered strong credit growth since 1992 and their net external creditor positions were eroding fast, signaling an accelerated pace of leveraging in the economy.

"While partly justified on the basis of the recent macroeconomic stabilization in both countries, the economic volatility inherent to Lebanon's geopolitical environment and the boom in the Egyptian stock market, in particular, heighten the importance of a cautious pace of private sector leveraging."

S&P ranked 45 industrialized and emerging market financial systems in five contingent liability risk categories.

Slowdown

The risk categories, ranging from 5 to 15 percent, to 35 to 60 percent, denote the percentage of financial institution loans to the private sector and non-financial public enterprises that could become problematic in a worst-case economic slowdown.

"Reflecting their risk categories and large size, the financial systems of China, the Czech Republic, Hong Kong, Japan, Korea, Malaysia, Thailand and Taiwan each represent 30 percent of GDP in contingent fiscal and economic costs.

"All of the countries' investment-grade ratings reflect their respective governments' low indebtedness, which confers substantial fiscal flexibility to overcome the system-wide problems," S&P said.

Conversely, despite their structural deficiencies and low ranking on the contingent liability scale, the financial sectors of Brazil, India, Russia and Turkey represent lower levels of contingent liabilities, at under 15 percent of GDP, because of their small size, the report said.

"The degree of asset quality problems of Japanese, Korean and Thai financial institutions are already within the ranges of their assigned contingent liability risk categories, due to the current economic difficulties in those countries," it said.

"The issue of transparency remains a challenge more generally in the region.

"Greater financial disclosure will, over the long term, result in more predictable and manageable cycles of stress." S&P said the level and rate of growth of leverage in an economy were key determinants of the likelihood of stress in financial systems, strong and weak alike.

Credit growth, corporate and house indebtedness, asset-price inflation, and external funding of financial institutions were key indicators of leverage.

"Rapid increases in two or more of these indicators denote a growing, and possibly excessive, degree of economy-wide leverage," S&P said, noting that increased private sector leverage was a significant contributor to past banking crises.