2022 Perspectives for the Public Sector

Citi Perspectives for the Public Sector 37 Governments Must Act to Prevent NPLs Derailing the Recovery G overnments around the world face greater financial pressures than ever before as the world recovers from COVID-19; many are still supporting their national economies to an unprecedented extent and must be cautious in exiting their various pandemic support measures. Governments long list of challenges will soon be joined by rising non-performing loans (NPLs). NPLs have yet to start increasing in much of the world — largely due to the introduction of insolvency and debt moratoria, as well as the extension of government support schemes. But an increase is inevitable. While many banks entered the crisis in good health, their credit strength has weakened over the past 18 months. As NPLs start to increase towards the end of 2021 and into 2022, governments must be prepared to act. The NPL rise is merely on hold The pandemic and its economic repercussions have lasted longer than many observers initially predicted. Consequently, government intervention in the economy and financial system has also been prolonged. Loan moratoria programs have been extensively used around the world. Most were expected to be short-lived in nature but successive lockdowns prompted several countries to retain their loan deferral schemes. In Europe, for example, a total of 38 countries introduced debt service moratoria based either on applicable national laws or on the initiative of the banking industry: of the total, only 60% matured at the end of 2020. As a result, the expected rise in NPLs was delayed. At the same time, some NPL expectations have been revised downwards. The UK Department for Business, Energy and Industrial Strategy originally expected as much as £20 billion of its £43 billion Bounce Back Loan Scheme to be lost to fraud as there was limited due diligence in order to rapidly get funds to troubled businesses. But following a strong economic recovery, just £5 billion of loans are now at risk of non-repayment; bad loans for the Coronavirus Business Interruption Loan Scheme, aimed at larger SMEs, are expected to be less than 1%. Georgi Yordanov Head of Public Sector Emerging Europe, Citi Emma Hampton Public Sector, EMEA, Citi