BAKU, Azerbaijan, June 27. With most central banks of the G20 emerging markets (EMs) increasing the refinancing rates, inflation is expected to decline in 2023, Trend reports via Moody’s Investors Service.
According to the report, for many emerging-market G-20 banks raising interest rates to contain inflation will improve the margins, but a faster acceleration of inflation will require increasing loan loss reserves, offsetting gains in margins.
“If inflation rates spike steeply and result in sharp increases in debt-servicing costs for borrowers, banks would have to increase their loan-loss provisions to levels that outweigh gains in margins, which would be credit negative,” the report said.
Meanwhile, among the G20 EMs, Turkey has been facing the highest inflation rate - at 73 percent in May 2022. As the report noted, global rising inflation rates are mainly due to supply constraints, rising commodity prices and currency pressures.
“Banks' credit costs also increase when inflation accelerates. An acceleration of inflation has also historically led to increases in credit costs in seven of the 10 systems. Moody expects banks in Russia and Turkey to post larger increases in credit costs in 2022-2023. In a scenario where inflation accelerates materially and leads to significant rate hikes, credit costs will also rise in Argentina, South Africa and Brazil,” the report said.
As Moody’s noted, asset risks for banks will outweigh the marginal benefits if inflation rises more sharply.
“An acceleration in inflation beyond Moody's expectation would lead to higher credit costs that will outweigh the benefits of gains in margins,” the report noted.
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