Credit demand - Solomon Star News


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Credit demand

05 June 2014

A POSITIVE economic outlook typically raises demand for credit as corporations take on loans with the view that they will be able to capture a piece of the more sanguine future growth outlook or profits, says a report released by the ANZ Bank.

It said the return they would earn on the funds would be greater than the interest rate hurdle they would pay back.

"The opposite would be true in times of economic uncertainty or during a downturn. A similar argument could be made for consumers where consumption smoothing takes place," the bank said in its Asia Pacific economics Pacific Quarterly report.

"Consumers take loans today to spend now, with the view of higher income in the future. On the supply side, commercial banks facilitate the lending process, however the central bank plays a key role.

"The central bank can ease lending conditions through injections of liquidity into the banking sector in times of slower economic growth, or absorb liquidity in times of excess. Some central banks also provide guidance on lending rates through their policy rate."

On whether traditional credit dynamics occurred in the Pacific, ANZ said the traditional system did not map one-to-one into the Pacific.

On the corporate side, the bank said economic booms did not always coincide with increases in credit growth.

"Slowdowns do not always drive a decline in credit extended. For example, moderating economic growth in PNG has coincided with firm credit growth.

"A possible explanation for this would be that during positive economic times, corporates are able to fund themselves through earnings, while during a slowdown they may need the extra capital injection to weather the moderation.

"On the consumer side, we also note that one-off lump sum payments have been partly behind credit expansions."

ANZ said earlier finance was a key input into sustainable economic growth.

Suva (Fiji Times)