Asset quality indicators are likely to deteriorate, and local geopolitics will also weigh in.
Banking systems of the largest emerging markets face three main risks in 2021 amidst the ongoing battle against the COVID-19 pandemic and its ill-effects to their local economies, reports S&P.
Emerging markets studied by S&P include China, India, Indonesia, Malaysia, Philippines, and Thailand.
One risk is the expected deterioration in asset quality indicators as regulator forbearance measures are lifted. Notably, loan moratoriums in many markets, particularly Malaysia, have been lifted late last year or will be lifted by early 2021.
Banks are expected to face delayed negative impact in their loan books and non-performing loan ratios to make up for a challenging year ahead.
Other major risks are the volatile geopolitical environment and, in some cases, domestic policy uncertainty; and, for a few banks in EM’s, the vulnerability to abrupt movements in capital flows.
Despite vaccine rollouts in several countries, there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects, notes S&P.
The ratings agency said that widespread immunization—which certain countries might achieve by midyear—will be key to paving the way for a return to more normal levels of social and economic activity this year.
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