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Prospects Weekly: Non-performing loans (NPLs) decline in Asia, but rise in ECA

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Private bank balance-sheets in developing Asia have improved along with the recovery in their economic activity. Non-performing bank loans (NPLs) in developing Asia as a share of total loans outstanding have declined from 5.3% in 2009 to 5% in 1H-2010 (median). However, NPLs have risen in high-income countries and in Europe and Central Asia, where bank recapitalization remains a priority and credit conditions are likely to remain tight. Global headline inflation eased in the last few months through July, although price-pressures have begun to firm in South Asia (strong domestic demand) and Europe and Central Asia (rising food prices). The recovery in investment demand has pushed up steel, copper and iron-ore prices to 2008 levels. As investment growth is expected to slow ahead, upward pressure on metals prices is likely to soften. Dollar prices of gold, other precious-metals, and oil are also up, reflecting dollar-weakness and investor search for yield prompted by low policy-induced interest rates.
Bank non-performing loans (NPLs) as a share of total loans outstanding remained stable or declined in 1H-2010 from 2009. However, in Europe and Central Asia and in some high-income countries NPLs continued to rise and remain a concern. mong 62 countries with 2010 data, over one-fourth (17) report NPLs of 9% or more. Most of these are in Europe and Central Asia, where output has yet to return to pre-crisis levels. Bank provisioning of NPLs varies widely; in Albania, Greece, Latvia, Romania, and Ukraine between 35% and 57% of NPLs are unprovisioned, whereas in Kazakhstan, Russia, FYR Macedonia and Serbia at least 98% of loans are provisioned. Where NPLs continue to rise, monetary authorities are expected to further raise bank-capital and liquidity requirements—suggesting continued tight credit. 
Global price pressures have eased in recent months with momentum inflation (3m/3m, seasonally adjusted, annualized rates) down from 4.6% in April to 1.8% in July (median). In East Asia and Pacific, quarterly inflation rates dipped to zero in July from 6.7% in Jan-2010 (median, 3m/3m, saar). In Latin America and the Caribbean, easing pressure reflects slack capacity. Among high-income countries inflationary pressures also weakened, due to tepid external demand (Hong Kong, Japan, Taiwan), ongoing private sector deleveraging (U.S.), and high excess capacity in some European countries. In contrast, strong demand and closing output gaps have contributed to building price pressures in several countries (Algeria, Indonesia, Kenya, India, Sri Lanka), while in Europe and Central Asia headline inflation is up due to drought-related increases in food prices. 
Metals prices have regained their 2008 peak levels. Increases this year are concentrated in iron ore, copper and tin, due partly to strong investment demand. A lack of significant supply growth on the horizon has contributed to copper prices nearing their former peak, while production declines in Indonesia contributed to tin prices exceeding their previous high. All other base-metals prices are well below prior highs on ample supplies. International iron-ore prices are determined with a lag and the Q3-rise reflects strong investment and steel demand in 1H-2010. A weak dollar has also recently buoyed dollar-term prices. More recently, steel production has slowed and iron-ore spot prices are falling. This, combined with an expected slowing in the pace of investment demand, points to a decline in metal prices in Q4. 

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