Banking risk monthly outlook: May 2025

Our banking risk experts provide insight into events impacting the financial sector in emerging markets in May. 

Preemptive lending support for the manufacturing sector is likely in response to tariffs in emerging Asian economies. The imposition of US tariffs on imports is expected to significantly impact emerging Asian economies, with a pronounced effect on their manufacturing sectors. Countries such as Vietnam and Thailand are likely to bear the brunt of these tariffs, while mainland China and India may also experience some level of strain. This situation is expected to lead to a deterioration in asset quality within these economies. Given the manufacturing sector's vulnerability to these tariffs, we anticipate that local central banks and government authorities will implement measures aimed at mitigating the adverse effects, likely similar to the policy responses observed during the COVID-19 pandemic. We foresee the introduction of enhanced credit assistance measures, which could include debt forgiveness initiatives (similar to those already enacted in Thailand for households with high debt burdens), as well as adjustments to the reserve requirement ratios. These strategies would aim to reduce the cost of borrowing for affected entities, thereby supporting their financial stability.

Increased business uncertainty regarding US tariffs is likely to contain upside to corporate lending growth among CEB banking sectors. Since September 2023, loan growth to nonfinancial corporates (NFCs) has remained below that of households on average in CEB banking sectors, reflective of robust household demand, improved consumer confidence, and subdued corporate borrowing. Given the current environment of higher uncertainty surrounding international trade and economic growth prospects, and amid the positive impact of interest rate reductions, NFC borrower demand is likely to remain restrained amid weaker manufacturing output and export demand, leading producers to exercise caution in their investments. Additionally, bank lending standards are likely to tighten on higher perceived economic and firm-level risks, which in turn will limit the upside to NFC credit disbursement.

Argentinian banks will experience balance sheet composition changes as capital controls are loosened. Following the removal of most capital controls in Argentina in mid-April, there were reports of some changes in the funding composition of banks, with greater inflows of dollar deposits. The trend is likely to slowly continue, especially if depositors have expectations of a future dollarization of the economy — as President Javier Milei has suggested. The increased access to foreign currency — combined with lower constraints in FX lending — is likely to increase some of the exposure of the banking sector to dollars, changing some of the composition of the sector going forward.

Proposed tightening of minimum reserve requirements would reinforce slowdown in lending amongst Kazakh banks. The Kazakh central bank is exploring the possibility of raising the minimum reserve requirements (MRR) for Kazakh banks, with tightening more significant for foreign currency liabilities. Additionally, current deliberations have earmarked the removal of a MRR carve-out for reverse repurchase operations (REPOs). Combined, the proposed amendments to the preexisting MRR are likely to dampen banks’ loan growth, although to the benefit of direct foreign exchange risks facing banks from moderate levels of deposit dollarization presently. A final decision is expected towards the end of the first half of 2025, according to the central bank.

The Lebanese government is likely to make significant progress in adopting the banking secrecy law and the bank restructuring law in the coming months. Under the deadline set by the IMF ahead of the Spring Meetings, the Lebanese cabinet adopted long-awaited amendments to the bank secrecy law and the bank restructuring law in April. Following the cabinet’s approval, the Lebanese parliament approved amendments to the banking secrecy law on April 25, allowing the Lebanese government to start roundtable talks with international donors on recovery and reconstruction with a reform agenda. Passing the banking secrecy law amendments will affirm Lebanon’s reform commitment and credibility, with priority on restructuring the banking sector. The government needs to reaffirm its commitment to structural reform and prioritize restructuring the banking sector to secure international support. In order to resume negotiation talks with the IMF to secure a US$2 billion reconstruction loan, the parliamentary approval of two draft laws is mandatory.