MercoPress. South Atlantic News Agency

IMF recommends “careful vigilance” of credit expansion in Latinamerica

The International Monetary Fund, IMF said Latin America's private credit expansion requires “careful vigilance”, particularly with household loans and collateral conditions.

"Recent rapid increases in banking credit require careful vigilance by financial sector supervisors, especially in cases when banks have limited experience with household loans and credits in unsecured collateral", points out an IMF report on the economic outlook for the region. Private sector credit continued to grow briskly in 2006 expanding an average rate of 32% in nominal terms in the seven largest Latinamerican countries, but was also significant in the rest of the region averaging 22% as a whole. The expansion in private credit was driven mostly by credit to households, averaging 30% in five of the largest seven countries as well as in the Caribbean and Central America. As a result household credit constitutes between 30 and 40% of private credit in the region. Household credit in 2006 expanded 45% in Argentina, 35% in Mexico and 30% in Peru. Although high rates of credit growth have in the past signaled increased vulnerabilities, points out the report, conditions in most countries do not yet appear to reflect a "lending boom", and overall real credit levels are still "generally low". Anoop Singh, head of the Western Hemisphere Department said that many countries in the region have ratios of financial intermediation to GDP, which are "very low compared to Asia", and the process of development will involve raising these ratios. He added there will be a period of rapid growth in credit because that is part of the process of financial innovation and development but what "is critical" is that when the catch-up takes place and credit begins to grow much more rapidly than it has in the past, it does so within "a framework of a well managed, well regulated, well supervised banking system" to ensure a sustainable development and not a temporary development that will threaten the banks. Mr Singh said that credit expansion in the region is closely linked to the great liquidity at world level and the fact "2006 was a year of extraordinarily strong economic performance for the Western Hemisphere" in a context of high world growth, ample private financing, historically low emerging market risk premia, and rising commodity prices In Latin America and the Caribbean, output grew at an average rate of 5½ percent, more than half a percentage point higher than forecasted last October. "The 2004 to 2006 period is now on record as the most vigorous period of growth in Latin America and the Caribbean since the 1970s, with growth averaging about 5¼ percent a year". Singh said the performance was supported by the fact inflation continued on a downward path falling to a regional average of 5%; primary fiscal balances and external current accounts were at record highs; public debt ratios continued falling, and debt structures improved further, with greater reliance on medium-and long-term local currency debt.