On September 10, 2021, Deputy Governor Nguyen Kim Anh of the State Bank of Vietnam (SBV) attended the virtual the Bank for International Settlements (BIS) Meeting for Governors of Emerging Market Economies (EMEs). Also attending the meeting, there were Central Banks' Governors and Deputy Governors, General Directors and Deputy General Directors of the Monetary Management Authorities from 22 EMEs which are members of the BIS.
Deputy Governor Nguyen Kim Anh representing the SBV at the Meeting
The Meeting discussed the following topics: (i) the impacts of the withdrawal of the fiscal support policies, the normalization of the monetary policy, the tightening of the global financial conditions on the EMEs’ corporate sector, and the effects on the banking sector; and (ii) the impacts of climate change-related risks and challenges on the EMEs' businesses. The participants in the Meeting agreed that the withdrawal of the fiscal support policies, the increases of the interest rates, as well as the tightening of the global financial conditions would have significant impacts on the health of the business sector, affecting the prospects of the region, especially in the EMEs. This has become even more urgent as the EME's corporate sector had accumulated many uncertainties even before the outbreaks of the COVID-19 pandemic. The BIS data shows that in the period of 2010 - 2019, in the EMEs, the debt ratio of the corporate sector increased from 6% of the GDP to 19% of the GDP. The net debt growth rate was higher than the revenue growth rate; and the proportion of enterprises with high default risks in the EMEs has also increased since the global financial crisis, from 7.5% in 2011 to 12% in 2019.
Uncertainties in the corporate sector can have a negative impact on the banking system. The participants assessed that the banks' bad debts in the EMEs may increase in 2022. The BIS assessed that about 10% of the big banks in the EMEs would not be able to maintain the minimum capital adequacy ratio after having taken into account the new losses. Meanwhile, the pandemic could cause unanticipated losses to be larger than the anticipated ones. In the banking sector, poor-performing banks are particularly vulnerable to the fluctuations in the corporate sector, as they tend to provide more loans to the poor-performing businesses, while the fiscal support which was reserved for those banks was limited due to the fiscal deficit even before the COVID-19 pandemic, limiting the government's ability to provide support packages.
Regarding the climate change-related challenges and risks, the participants agreed that these are medium-term challenges for businesses in the EMEs. The big carbon emitters would face increasing risks due to the changes in the investment and consumption models, such as the requirements of ensuring "green" factors, affecting the profitability of the companies, forcing them to change their business strategies.
With challenges and uncertainties which the EME's corporate sector is facing, the participants suggested that the support policies should not be withdrawn immediately, instead, they should be withdrawn gradually to ensure that the businesses and the banks have time to adapt, avoiding sudden impacts; and the monetary regulatory authorities also have better capabilities to assess the impacts of the withdrawal of the support policies, and make adjustments if necessary. Along with that, it is necessary to minimize the chain impacts from the corporate sector to the banking sector. The central banks and monetary regulatory authorities, the inspectors and supervisors of the financial systems should be cautious in considering when to tighten the regulations on operational safety for the banking sector, which have been loosened to promote lending. Finally, in response to the climate change-related risks, most of the participants agreed that the central banks have an indispensable role, and recommended to consider applying a number of possible measures, such as improving the understanding of businesses and banks, integrating climate scenarios in the resilience tests such as those being implemented in South Africa.
Le Hang