Credit levels will need to double over the next 10 years, growing by 103 trillion U.S. dollars, to support consensus-projected economic growth, a report said on Tuesday.
The report which titled "More Credit with Fewer Crises: Responsibly Meeting the World's Growing Demand for Credit", was released by the World Economic Forum in collaboration with McKinsey & Company.
The study develops a detailed global credit model using historical credit volumes and forecasting potential credit demand to 2020 across 79 countries, representing 99 percent of world credit volume.
It applies a sustainability methodology to the projected credit demand, using newly developed metrics to answer the following two questions: Will credit growth be sufficient to meet demand? Is there a risk of future credit crises and, if so, where?
The report finds that meeting credit demand will be challenging. Globally, financial protectionism may constrain cross-border financing, a key to the provision of sufficient credit in the next decade, as global imbalances persist.
In addition, the regions will experience varying issues: Asia will face the challenge of meeting the high credit demand growth of 40 trillion dollars with less developed financial systems and capital markets.
In the European Union, a further 13 trillion dollars of credit in the form of bank lending will be needed. To supply this, banks will require additional capital that, after retained earnings, could lead to a capital shortfall of 2 trillion dollar.
Analysis shows that the United States would continue to need to draw on global savings, potentially by up to 3.8 trillion dollars in 2020, in order to fund its credit needs, unless there is a marked increase in U.S. domestic savings rates.
"Leaders in the private and public sectors must take decisive actions to avoid contributing to credit hotspots and coldspots, while still meeting the 100 trillion dollars of credit demanded to sustain economic growth over the next 10 years," said GianCarlo Bruno, Director, Financial Services Industries, World Economic Forum.
Despite widespread deleveraging, a number of "hotspots" i. e. segments where credit levels grow in excess of sustainable levels will persist, while new ones emerge.
By 2020, these will include retail credit segments in countries representing almost half of the global GDP. By contrast, government credit hotspots are projected for a much smaller set of countries, between them representing 13-14 percent of world GDP. In wholesale credit, Asia and Western Europe will be the main drivers of hotspots in 2020.
The report finds that the large projection in credit demand can be safely met, but financial institutions, regulators and policy- makers need more robust indicators of unsustainable lending, contagion risk and credit shortages and better mechanisms to ensure credit promotes development.
"This report is a timely contribution to the discussion of what's needed to secure stable and sustainable credit for the world economy in the years ahead. Given the huge financing needs of both developed and developing markets, it's a crucial issue for policy-makers and the financial industry to tackle globally," said Deven Sharma, President, Standard & Poor's.
"The banking system has a critical role in supporting future economic growth and this report highlights ways in which it can do so with reduced risk of crises. In particular, there is a pressing need for continued development of capital markets in developing economies to support their continued economic success," said Charles Roxburgh, Director of McKinsey Global Institute./.