Global Insight Rates Financial Stability, Risks for Emerging Economies

Global Insight

Global Insight, the world's leading economic forecasting and financial analysis company, has released a unique set of risk ratings gauging banking sector stability in key emerging economies around the world.

According to Global Insight's recently-released Banking Risk Service, the global financial crisis has had relatively limited direct effect on banking stability in most emerging markets thus far. However, pressures are starting to mount and the outlook has turned negative for the banking sectors in a number of major emerging economies.

"We looked at 33 emerging markets and found that credit expansion in many of these economies has been very rapid over the past several years, driven in large part by strong economic growth. However, in many cases, the rapidity of this credit growth has led to questionable credit risk assessment practices and asset price inflation," said Toby Wight, manager of Global Insight's Banking Risk Service.

He continued, "These risks are compounded, in many instances, by high levels of non-performing loans, poor financial sector regulation, and the limited extent of economic reforms, all of which have further negative implications for bank stability. The degree to which this occurs will vary greatly by country, but banking sectors in general will be exposed to increased stress and risk of instability in the near term."

Highlights from Global Insight's Banking Risk Rating Service Analysis

Banking Sector Risk Rankings for 33 Emerging Markets

Highest Risk Countries:

The countries with the highest risk of systemic banking sector instability are Venezuela, Iran, and Nigeria. The
banking sectors in these countries suffer from strong political influence and unfavourable economic policies. In the case of Iran and Venezuela, the high level of state ownership by a financially secure sovereign government
brings some stability, but financially unsound lending practices are prevalent. Capital levels are relatively strong in Nigeria, but the inadequate capitalization of banks in Iran and Venezuela provide much less cushion against potential negative shocks.

Lowest Risk Countries:

In contrast, the lowest-risk countries in our rankings are Saudi Arabia, Taiwan, United Arab Emirates, and Malaysia, where capital levels are high, liquidity is sufficient, bank management is adequate, and the regulatory environment is prudent. Our strong rating for these countries carries a stable outlook with no significant deterioration of their present status expected in the near-term.

Global Insight's banking sector risk ratings for key emerging markets are a central part of the recently-released Banking Risk Service. Designed to complement country-level macro-economic risk assessment and ratings of
individual banks and other financial institutions, the service is unique to the market. Web based with continuous updates, this service monitors and analyzes banking sector stability in 33 key emerging markets, with more soon to be added.

The Banking Risk Service provides a complete picture of the banking sector-structure, evolution, trends, capital adequacy, liquidity, credit risk, and regulatory environment, as well as additional consideration of non-bank financial markets-in-depth analysis crucial to a comprehensive understanding of the risks present in each economy.