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Transcript of 1 APRIL 2006 Credit Trends in LA: The Chilean Experience José De Gregorio Vice Governor Central...
APRIL 20061
Credit Trends in LA: The Chilean Experience
José De GregorioVice Governor
Central Bank of Chile
C E N T R A L B A N K O F C H I L E APRIL 20062
Contents
1. Credit growth and booms: characteristics
2. Credit trends in LA
3. Credit trends in Chile
4. Concluding remarks
C E N T R A L B A N K O F C H I L E APRIL 20063
Credit can grow rapidly for three reasons: financial deepening (trend) normal cyclical upturns excessive cyclical movements (“credit booms”)
Credit growth and booms: characteristics
C E N T R A L B A N K O F C H I L E APRIL 20064
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 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
Credit growth and booms: characteristics
C E N T R A L B A N K O F C H I L E APRIL 20065
What do credit booms looks like? Credit booms are associated with
macroeconomic fluctuations as follows: 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
Credit growth and booms: characteristics
C E N T R A L B A N K O F C H I L E APRIL 20066
Credit trends in LA
Domestic credit in LA has showed an increasing trend in the last decade
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
Domestic Credit
0
10
20
30
40
50
60
70
80
90
100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004%
of
GD
PArgentina Bolivia Brazil Chile ColombiaHonduras Mexico Peru Uruguay
Source: IFS.
C E N T R A L B A N K O F C H I L E APRIL 20067
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)
Small and open industrialized economies such as Australia, Canada and New Zealand have much higher levels of domestic credit than the average LA country
Japan, UK and the US also show credit-to-GDP ratios relatively high
Domestic Credit (% GDP, 2004)
0 20 40 60 80 100 120 140 160 180
Peru
Mexico
Colombia
Honduras
Bolivia
Argentina
Uruguay
Brazil
Chile
Canada
United States
Australia
New Zealand
Japan
United Kingdom
Source: IFS.
Credit trends in LA
C E N T R A L B A N K O F C H I L E APRIL 20068
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 -20
-10
0
10
20
30
40
50
J an-1995 J an-1997 J an-1999 J an-2001 J an-2003 J an-2005
-20
-10
0
10
20
30
40
50
Personal Loans Mortgage
Total Corporate
Anual growth
Source: SBIF.
C E N T R A L B A N K O F C H I L E APRIL 20069
Credit trends in Chile
However, the increasing trend is more associated to recovery from the last recession rather than continuous growth in credit
Retail Credit
2
4
6
8
10
12
J an-89
J an-91
J an-93
J an-95
J an-97
J an-99
J an-01
J an-03
J an-05
% to
tal c
redi
t
Source: SBIF.
C E N T R A L B A N K O F C H I L E APRIL 200610
0%
20%
40%
60%
80%
100%
1990 1995 2000 2005
corporate mortgage personal loans
Bank loans by type(% of total loans)
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
Source: SBIF.
Credit trends in Chile
C E N T R A L B A N K O F C H I L E APRIL 200611
Source: Calculations based on SVS, SBIF and ACHEF information
Credit trends in Chile
Corporate Total Debt
(% of the GDP)
0
10
20
30
40
50
60
70
80
90
100
110
95 96 97 98 99 00 01 02 03 04 05
External debt Commercial lending and other Issued debt
C E N T R A L B A N K O F C H I L E APRIL 200612
Credit trends in Chile
Household Debt
(% of the GDP)
Source: SBIF, SVS, SuSeSo, Central Bank of Chile
0
5
10
15
20
25
30
Sep- 03 Mar- 04 Sep- 04 Mar- 05 Sep- 05
Mortgage
Consumer lending with banks
Other consumer lending
C E N T R A L B A N K O F C H I L E APRIL 200613
Source: SBIF, SVS, SuSeSo, Central Bank of Chile
Debt – Disposable Income Ratios (DIR)
(%)
Credit trends in Chile
0
5
10
15
20
25
30
35
40
45
50
Dec-01 J un-02 Dec-02 J un-03 Dec-03 J un-04 Dec-04 J un-05
DIR consumer loans, maturity of less than 1 year
DIR consumer loans, maturity of over 1 year
DIR mortgage
C E N T R A L B A N K O F C H I L E APRIL 200614
Debt Service – Disposable Income Ratios (SIR)
(%)
Source: SBIF, SVS, SuSeSo, Central Bank of Chile
Credit trends in Chile
0
2
4
6
8
10
12
14
16
18
Dec-01 J un-02 Dec-02 J un-03 Dec-03 J un-04 Dec-04 J un-05
SIR consumer loans, maturity of less than 1 year
SIR consumer loans, maturity of over 1 year
SIR mortgage
C E N T R A L B A N K O F C H I L E APRIL 200615
(*) 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
Credit trends in Chile
Household Lending*: International Comparison
(% of the GDP)H
ola
nd
Germ
any
Port
ugal
Irela
nd
Spain
Fin
land
Fra
nce
Belg
ium
Austr
ia
Italy
Chile
0
30
60
90
120
150
C E N T R A L B A N K O F C H I L E APRIL 200616
(*) Maturity of over 1 year for all countries, except for USA. Total SIR and total DIR for USA
Source: Central Bank of Chile
Credit trends in Chile
(*) USA
Chile
EU
Spain
Germany Ireland
0
5
10
15
0 20 40 60 80 100 120
DIR
SIR
Consumer Loans Indicators (SIR and DIR):
International Comparison
C E N T R A L B A N K O F C H I L E APRIL 200617
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
Credit trends in Chile
C E N T R A L B A N K O F C H I L E APRIL 200618
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
Concluding remarks
C E N T R A L B A N K O F C H I L E APRIL 200619
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
Concluding remarks
C E N T R A L B A N K O F C H I L E APRIL 200620
References
• 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.
APRIL 200621
Credit Trends in LA: The Chilean Experience
José De GregorioVice Governor
Central Bank of Chile