Loans Market Flummoxed by Russian Sanctions

The survey was conducted in the lead-up to the Association’s second Developing Markets Conference, held in London on April 30.

More than half of those surveyed (53.9%) identified external factors as the main challenge to developing market loan market growth, while 25.5% picked volatility in foreign exchange (FX) and commodity prices. In order to further develop the loan markets in these countries, survey respondents believed the most effective approaches would lie in improving documentation, governance standards and judicial certainty (28.7%) and attracting new borrowers to the market (22%).

Speakers at the event included representatives from banks, insurance companies and legal firms. Topics of discussion included political and security risk in developing market lending, opportunities in sub-Saharan Africa and in Central and Eastern Europe (CEE), Commonwealth of Independent States (CIS) and Russia, and North Africa. How to mitigate legal risk in frontier markets – such as Kenya, Nigeria and Ukraine – was also discussed, along with the role of insurance companies and of non-bank investment companies in developing market lending.

In the current uncertain geopolitical climate, political risk is an understandable concern for market lenders. “Banks and corporations have historically looked at emerging markets (EMs) from a risk perspective and are thus possibly better positioned to judge risks in EMs than in developed markets,” said Simon Quijano-Evans, head of EM research at Commerzbank in London.

“They are much more attuned to EM risks and understand what they are looking for. In developed markets there are many risks that are probably underestimated, as we have seen in the economic crises since 2008. This is also reflected in the relative ratings dynamics in some developed market countries.”

Sanctions Spell Caution

When it comes to assessing risk in Russia, the picture is far from clear cut. “Sanctions are a factor in the Russian market as no one will take the risk of violating any sanctions,” said Quijano-Evans. “The data out of Russia show that since June 2014 the country’s total external debt has fallen by US$170bn, compared to a drop in FX reserves of around US$95bn, which actually highlights an ‘improving’ credit story.

“In the rest of Eastern Europe there is a lot of liquidity due to quantitative easing. QE in the Czech Republic would probably not work because there is little appetite for borrowing – people are worried about paying back debt. But this is also happening in some eurozone countries also. There is too much reliance on central banks to make up for political deficiencies regarding the economy in both developed and developing markets.”

Another speaker noted that there had been: “… an incredibly positive response from the loan market to work through the issues in Russia. Everyone has reacted in a reasonably calm way and there has not been much panic.”

In a report on European Union (EU) sanctions against Russia and their impact on the loans market, the LMA noted that a breach of sanctions rules can give rise to potential criminal liability. The lending market had responded by taking a “cautious view” when interpreting EU regulation in the light of particular loan and credit transactions. In general the loan market was finding the EU regulation relating to Russia sanctions “vague and difficult to interpret”.

Asked what impact the sanctions have had so far on the loan market, one panellist said a slowdown in the number of syndicated loans being transacted was not solely due to sanctions. Other contributing factors include a change of strategy by some banks, which are increasingly focusing on building relationships with existing clients rather than pursuing new deals.

Across the CEE, CIS and Russian region there is an increasing desire to borrow in national currencies, with countries such as Poland and the Czech Republic very liquid in terms of their local currencies. Syndicated loans in both countries are almost entirely transacted in their local currencies. Not only do these currencies better suit clients, but they are also well served by local banks. The LMA’s survey reflected this trend, with 35.2% stating that local banks would demonstrate the greatest growth in developing market lending during 2015.

Poland was identified by 42.1% of survey respondents as the CEE country that held the greatest opportunities for lending in 2015, followed by Russia with 21.8%.

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