Elections likely to trigger policy uncertainties for banks in 2024, predicts Moody's

Emerging Asia-Pacific may continue to raise rates to counter large swings in capital flows and currency volatility while guarding against still-significant local inflation, Moody said.

The year 2024 is set to be the greatest election year in history with as many as 70 elections lined up across 40 countries. This will drive India and some other poll-bound nations in throes of some kind of policy uncertainties next year, ratings agency Moody's has predicted.

“Banks in the US, UK, India, Mexico, Turkiye and South Africa will face policy uncertainties stemming from a heavy calendar of elections in 2024,” it said in a report on December 4.

Additionally, the agency’s outlook on global banks turned negative as central banks' tighter monetary policies have resulted in lower growth in gross domestic product (GDP). The agency said that reduced liquidity and strained repayment capacity will squeeze loan quality, leading to greater asset risks.

Also read: Moody's downgrades outlook on China credit rating over debt fears

“Our outlook for global banks for 2024 is negative as the central banks' tighter monetary policies have resulted in lower GDP growth. Profitability gains will likely subside on higher funding costs, lower loan growth and reserve buildups. Funding and liquidity will be more difficult,” the agency said in a report.

The agency highlighted that geopolitical tensions between China and the US or EU are reshaping industrial policies and fomenting supply-chain diversification, resulting in faster GDP growth in Mexico from nearshoring.

“Geopolitical tensions will also benefit countries in the Association of Southeast Asian Nations (ASEAN) and in Central America, as well as India,” it said.

The agency also said that growth for most Asia-Pacific economies will hold up well, but China’s economic slowdown poses risks.

“Growth in Asia-Pacific’s most advanced economies will stabilise at low levels after slowing in 2023 on weak global trade and high interest rates. Growth in the region’s emerging economies, led by domestic-focused India and Indonesia, will remain resilient,” the agency said.

Global rate hikes

Moody's highlighted that the People's Bank of China (PBOC) is likely to maintain an easy monetary policy stance. “PBOC has lowered the lending rates and the reserve requirement ratio to facilitate bank lending and we could see additional cuts to shore up an economic recovery in the coming months.

The central banks in Latin America and Eastern Europe, including Brazil and Hungary, have begun to cut rates amid easing inflation. “Other major emerging market central banks reached stability in 2023, including India and South Africa. However, Indonesia and the Philippines resumed rate hikes in October, the latter in an unexpected off-cycle hike to anchor long term inflation.

Emerging Asia-Pacific may continue to raise rates to counter large swings in capital flows and currency volatility while guarding against still-significant local inflation, Moody's said.