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.