Credit expansion in emerging markets: A propeller of growth?

Emerging market economies (EMEs) have experienced a decade of rapid credit growth. EMEs differ in the composition of their credit portfolio and in the contribution of each type of loan—corporate, consumer and housing—to the expansion of the stock of credit. For example, in the case of Brazil, the expansion of consumer and corporate credit have contributed broadly equal to credit grotwh, while in other countries, corporate loans or mortgages explain the bulk of the credit increase.

This paper addresses the following questions: What has been the impact of credit growth on GDP growth? Has the composition of credit (i.e. corporate, consumer, and housing credit) mattered for GDP growth? This paper complements the existing literature as the analysis of the impact of the change in credit composition on output is novel, particularly a cross-country panel analysis.

A cross-country regression for a panel comprising 31 EMEs for the period 2002-12 is used to assess the effects of corporate, consumer, and housing credit on real GDP growth, as well as on consumption and investment.

The results confirm the different impact of consumer, corporate and housing credit on economic growth. In particular, evidence is presented showing that consumer credit has a significantly positive effect on the consumption but on not investment. On the other hand, corporate credit seems to have an impact on investment but not on consumption.  Quantitatively, corporate credit plays a more important role for GDP growth than consumer credit through its impact on investment.

This paper confirms that the composition of credit growth has important implications for output dynamics, and therefore, helps explain why financial deepening may have different effect across countries.