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Credit Trends in LA: The Chilean Experience José De Gregorio Vice Governor Central Bank of Chile 1 APRIL 2006 Contents 1. Credit growth and booms: characteristics 2. Credit trends in LA 3. Credit trends in Chile 4. Concluding remarks 2 CENTRAL BANK OF CHILE APRIL 2006 Credit growth and booms: characteristics Credit can grow rapidly for three reasons: financial deepening (trend) normal cyclical upturns excessive cyclical movements (“credit booms”) 3 CENTRAL BANK OF CHILE APRIL 2006 Credit growth and booms: characteristics What do credit booms looks like? Credit booms in emerging market countries have five key characteristics (WEO, April 2004): They are much less common than episodes of rapid 4 credit growth They are synchronized across countries They are somewhat asymmetric There is almost a 70 percent probability that a credit boom coincides with either a consumption or investment boom They are often associated with banking and currency crises CENTRAL BANK OF CHILE APRIL 2006 Credit growth and booms: characteristics What do credit booms looks like? Credit booms are associated macroeconomic fluctuations as follows: with Credit booms are associated with a cyclical upturn, followed by a sharp downturn, in economic activity and private absorption Credit booms are associated with a rapid increase, and subsequent fall, in the price of nontradables relative to tradables Credit booms are accompanied by an increase in real stock prices and a subsequent dramatic drop Credit booms do not have a major effect on inflation 5 CENTRAL BANK OF CHILE APRIL 2006 Credit trends in LA Domestic credit in LA has showed an increasing trend in the last decade Domestic Credit 100 90 80 6 A key question is whether strong credit growth is part of the ongoing process of "financial deepening“ or whether some countries are now experiencing a credit boom, a situation where credit is expanding at an unsustainable pace % of GDP 70 60 50 40 30 20 10 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Argentina Honduras Bolivia Mexico Source: IFS. CENTRAL BANK OF CHILE APRIL 2006 Brazil Peru Chile Uruguay Colombia Credit trends in LA Financial deepening is still relatively low in LA vis-à-vis industrialized economies (and even other groups of developing economies: East Asia, Middle East, and North Africa) Domestic Credit (% GDP, 2004) United Kingdom Japan New Zealand Australia United States Canada Chile 7 Small and open industrialized economies such as Australia, Canada and New Zealand have much higher levels of domestic credit than the average LA country Brazil Uruguay Argentina Bolivia Honduras Colombia Japan, UK and the US also show credit-to-GDP ratios relatively high CENTRAL BANK OF CHILE Mexico Peru 0 20 40 60 Source: IFS. APRIL 2006 80 100 120 140 160 180 Credit trends in Chile In the recent cycle, credit has increased significantly in all sectors But, rapid credit growth has been particularly strong in the retail and housing sectors 50 50 Anual growth 40 40 30 30 20 20 10 10 0 0 -10 Personal Loans Total -20 Jan-1995 -20 Jan-1997 Jan-1999 Source: SBIF. 8 -10 Mortgage Corporate CENTRAL BANK OF CHILE APRIL 2006 Jan-2001 Jan-2003 Jan-2005 Credit trends in Chile However, the increasing 12 10 % total credit trend is more associated to recovery from the last recession rather than continuous growth in credit Retail Credit 8 6 4 2 Jan89 Jan91 Jan93 Jan95 Source: SBIF. 9 CENTRAL BANK OF CHILE APRIL 2006 Jan97 Jan99 Jan01 Jan03 Jan05 Credit trends in Chile Household credit (retail and housing) has increased its participation in recent years Commercial loans remain the most important source of risk However, the increasing credit growth to the other sectors should be a matter of concern Bank loans by type 100% (% of total loans) 80% 60% 40% 20% 0% 1990 corporate 1995 mortgage Source: SBIF. 10 CENTRAL BANK OF CHILE APRIL 2006 2000 2005 personal loans Credit trends in Chile Corporate Total Debt (% of the GDP) 110 100 90 80 70 60 50 40 30 20 10 0 95 96 External debt 97 98 99 00 01 02 03 Com m ercial lending and other Source: Calculations based on SVS, SBIF and ACHEF information 11 CENTRAL BANK OF CHILE APRIL 2006 04 05 Issued debt Credit trends in Chile Household Debt (% of the GDP) 30 25 Other consumer lending 20 Consumer lending with banks 15 10 Mortgage 5 0 Sep-03 Mar-04 Sep-04 Mar-05 Source: SBIF, SVS, SuSeSo, Central Bank of Chile 12 CENTRAL BANK OF CHILE APRIL 2006 Sep-05 Credit trends in Chile Debt – Disposable Income Ratios (DIR) (%) 50 DIR consumer loans, maturity of less than 1 year 45 40 35 30 DIR consumer loans, maturity of over 1 year 25 20 15 DIR mortgage 10 5 0 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Source: SBIF, SVS, SuSeSo, Central Bank of Chile 13 CENTRAL BANK OF CHILE APRIL 2006 Jun-05 Credit trends in Chile Debt Service – Disposable Income Ratios (SIR) (%) 18 16 14 12 10 SIR consumer loans, maturity of less than 1 year 8 6 SIR consumer loans, maturity of over 1 year 4 2 SIR mortgage 0 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Source: SBIF, SVS, SuSeSo, Central Bank of Chile 14 CENTRAL BANK OF CHILE APRIL 2006 Jun-05 Credit trends in Chile Household Lending*: International Comparison 30 0 (*) Total household lending (retail and mortgage) for period 1999-2001, except for Chile, which corresponds to October 2004. Source: ECB, Central Bank of Chile, own countries central banks 15 CENTRAL BANK OF CHILE APRIL 2006 Chile Italy Austria Belgium 60 France Finland Spain Portugal Ireland 90 Germany 120 Holand 150 (% of the GDP) Credit trends in Chile Consumer Loans Indicators (SIR and DIR): International Comparison 15 Ireland Germany )*( USA Spain 10 EU SIR Chile 5 0 0 20 (*) Maturity of over 1 year for all countries, except for USA. Total SIR and total DIR for USA 40 60 80 100 DIR Source: Central Bank of Chile 16 CENTRAL BANK OF CHILE APRIL 2006 120 Credit trends in Chile Although a matter of concern, the rapid growth in Chile has been positive: Driven by domestic demand, it has boosted consumption, while low real interest rates are providing a stimulus to investment Against this background, inflationary pressures have not picked up and the current account deficit has remained reduced 17 CENTRAL BANK OF CHILE APRIL 2006 Concluding remarks Credit booms are not easy to identify, calling for policymakers to make difficult judgments The effects of the increasing domestic credit in LA are not clear The signs accompanying credit expansion should be a matter of concern: growing macroeconomic, financial and corporate imbalances 18 CENTRAL BANK OF CHILE APRIL 2006 Concluding remarks Measures are needed to reduce the risks that are associated with strong credit growth: Improving surveillance of the banking system Increasing scrutiny of corporate borrowing Tightening macroeconomic conditions Better inform borrowers about the risks they face and how exchange and interest rate movements could affect their debt-servicing costs 19 CENTRAL BANK OF CHILE APRIL 2006 References 20 • Betancour C., J. De Gregorio and A. Jara (2006), “Improving the Banking System: the Chilean Experience”, Economic Policy Paper Nº 16, Central Bank of Chile, March. • Central Bank of Chile (2005), “Financial Stability Report”, second half. • IMF (2004), World Economic Outlook (WEO), ch. IV, April. • Ipes (2005), Unlocking Credit: the Quest for Deep and Stable Bank Lending, IADB. CENTRAL BANK OF CHILE APRIL 2006 Credit Trends in LA: The Chilean Experience José De Gregorio Vice Governor Central Bank of Chile 21 APRIL 2006