Published on All About Finance

The recent credit surge, seen in historical context

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Since the global financial crisis, credit to the private nonfinancial sector in emerging markets and developing economies (EMDEs) has surged. Within this overall surge, however, there has been considerable divergence between commodity-exporting and -importing economies. In commodity-importing EMDEs, credit-to-GDP ratios are high by historical standards but are now stable or declining. In commodity-exporting EMDEs, in contrast, credit growth has been near a pace associated with past credit booms, but private sector credit levels are still moderate, and, with a few exceptions, still well below thresholds identified as warning signs.

Figure 1. Credit-to-GDP (broader sample)

Figure 1. Credit-to-GDP (broader sample)

Sources: Bank for International Settlements, International Monetary Fund's International Financial Statistics, World Bank. 
Notes: Unweighted averages. Data availability as in D.

Since the global financial crisis, credit to the nonfinancial private sector has risen rapidly in EMDEs. An analytical chapter in the June 2016 Global Economic Prospects found that between 2010 and 2015, credit to the nonfinancial private sector increased by more than 10 percentage points of GDP to 60 percent of GDP, on average (and to 84.5 percent of GDP, on average, among the 14 largest EMDEs). Corporate borrowing accounted for most of this recent increase.

Figure 2. Credit to the private sector compared to thresholds, 1997 vs 2015Q3

Figure 2. Credit to the private sector compared to thresholds, 1997 vs 2015Q3

Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund, World Bank. 
Notes: Orange lines show the thresholds (=10 percent of GDP) identified by Drehman (2013) for deviation of the private sector credit-to-GDP ratio from its trend (derived using a Hodrick-Prescott filter). Blue bars indicate the ranges of these measures; red diamonds show medians.  
Notes: 14 major EMDEs used in left panel; broader sample of 55 EMDEs used in right panel. See June 2016 Global  Economic Prospects for details.

A large literature has identified credit booms as an early warning indicator of macroeconomic or financial stress. In the past, the end of a credit boom has often exposed an accumulation of non-performing bank loans. The deleveraging process that often follows a credit boom would hobble growth at a time when EMDEs are already adjusting to a difficult external environment.

During typical credit booms in the past, credit to the nonfinancial private sector grew by more than 6 percentage points of GDP a year and peaked at around 52 percent of GDP. As credit grew, current account deficits widened and real GDP rose well above trend. Since 2012, levels of private sector credit in commodity importing EMDEs have been considerably higher than during previous credit booms, but credit growth has been well below levels associated with past booms (except in China). In contrast, in commodity exporting countries, while credit growth has been near the pace associated with past credit booms, it has been from low levels. The first figure illustrates how the pace of credit growth has been the most pronounced, as is nearing a pace associated with credit booms, among commodity exporters. It also shows how credit-to-GDP ratios are high but stable or shrinking in commodity importers.

Over the past quarter-century, about one-third of credit booms were followed by at least a mild deleveraging within three years. During deleveraging, credit to the nonfinancial private sector contracted by almost 2 percentage points of GDP per year and fell to 35 percent of GDP, on average. Deleveraging episodes were associated with current account improvements but also with slowing growth.

A large literature examines potential thresholds for private sector credit growth that may signal looming stress. Most EMDEs are still some distance from that line – identified in studies as around 10 percentage points of GDP above long-term trend. In a few EMDEs, private sector credit exceeded that level in the third quarter of 2015, and they were mostly energy exporters. Figure 2 shows how in most emerging market and developing economies, private sector credit now is still some distance away from the thresholds associated with financial stress. The figure shows that in 1997, the top end of the range was well above the threshold; while in the third quarter of 2015, the threshold was near the top of the range.

Even if a credit boom does not end in a crisis, it can cause disruptions. A debt overhang can weigh on long-term growth as subsequent balance sheet repair unfolds (Lo and Rogoff 2015). Furthermore, private sector credit above 80-100 percent of GDP has been found to no longer enhance growth (Arcand et al. 2012).

Policy buffers are considerably stronger now than in the 1990s. Reserves in EMDEs (in percent of GDP) are more than 60 percent higher than in the 1990s. Government debt is 10 percentage points of GDP below 1990s levels and external debt is 16 percentage points of GDP lower. However, weak post-crisis growth and recent U.S. dollar appreciation are eroding these policy buffers.

Policy options are available that could help contain risks from rapid credit growth while still maintaining an accommodative monetary policy stance (Arteta et al. 2015). To slow household credit growth, tighter ceilings on the debt service-to-income ratios of lower-income households, better risk-based pricing of household lending, and differential loan-to-value ceilings on first and second mortgages have been effective.  To contain risks from corporate credit growth, increased stress testing of corporates’ balance sheets and legislative and regulatory steps to facilitate restructuring of nonperforming loans and corporate resolution are options. Measures to contain foreign currency risks in lending to corporates, such as more intensive stress tests, more intrusive monitoring of liquidity ratios in foreign currencies, and additional hedging requirements, are also options.


Arcand, J-L, E. Berkes, and U. Panizza. 2012. “Too Much Finance?” Working Paper 12/161, International Monetary Fund, Washington, DC.

Arteta, C., M. A. Kose, F. Ohnsorge, and M. Stocker. 2015. “The Coming U.S. Interest Rate Tightening Cycle: Smooth Sailing or Stormy Waters?” Policy Research Note No. 2, World Bank, Washington, DC.

Drehmann, M. 2013. “Total Credit as an Early Warning Indicator for Systemic Banking Crises.” BIS Quarterly Review (June): 41-45, Bank for International Settlements, Basel.

Lo, S., and K, Rogoff. 2015. “Secular Stagnation, Debt Overhang and Other Rationales for Sluggish Growth, Six Years On.” Working Papers 482, Bank for International Settlements, Basel.


Franziska Ohnsorge

Chief Economist, South Asia Region

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