1 APRIL 2006 Credit Trends in LA: The Chilean Experience José De Gregorio Vice Governor Central Bank of Chile.

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


Credit can grow rapidly for three reasons: financial deepening (trend) normal cyclical upturns excessive cyclical movements (“credit booms”)

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 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



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 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.


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


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.



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.


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.



Source: Calculations based on SVS, SBIF and ACHEF information


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



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



Debt – Disposable Income Ratios (DIR)

(%)


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


Debt Service – Disposable Income Ratios (SIR)

(%)



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


(*) 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


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


(*) Maturity of over 1 year for all countries, except for USA. Total SIR and total DIR for USA

Source: Central Bank of 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


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 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


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


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

1 APRIL 2006 Credit Trends in LA: The Chilean Experience José De Gregorio Vice Governor Central Bank of Chile.

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