The uncomfortably strong credit growth in major Latin American countries is likely to see the region's growth slowing in the second half of this year, Capital Economics Emerging Markets economist David Rees said in a note Monday.
The firm warned that if the current pace of credit growth continues unchecked the South American economy may witness a sharper adjustment by year-end. Credit risks are greatest in Argentina and Venezuela, while the Colombian financial system has become more vulnerable to external shocks, Rees said.
The economist, however, hopes that a deterioration in the external environment is unlikely to trigger a fully blown credit crisis in Latin America as the bulk of bank lending has been made in local currency. Also, short-term external debt of banks remains low by international standards and well covered by foreign exchange reserves.
Credit growth continues to boom in Argentina and Venezuela, helped mainly by excessively loose monetary policies. In Columbia, where policymakers have been struggling to prevent rapid capital inflows from pushing up credit growth, consumer credit has continued to expand by 30 percent annually.
Meanwhile, Brazilian banks increased loan loss provisions and cut back on new lending in recent months after defaults on commercial loans rose to historically high levels and consumer delinquencies rose sharply despite a sharp fall in unemployment.
The resultant slowdown in Brazilian bank lending, which is likely to result in the economy under-performing this year, highlights the unsustainable nature of rapid credit growth in parts of Latin America, the economist added.
For comments and feedback: editorial@rttnews.com