New rich may help world economy resist recession

By Ana Nicolaci da Costa and Sujata Rao

LONDON (Reuters) - Wealthier populations in emerging markets have long been seen as an engine of growth and, aided by more mature banking systems and greater access to credit, they may help shield the world economy from recession.

As the U.S. economy stalls under the weight of a housing bust and subprime mortgage crisis, credit and bond markets everywhere have been treated by investors with suspicion.

Yet a rapid pick-up in bank credit in emerging markets is fuelling still brisk demand for goods and services from those regions -- one reason behind emerging markets' stellar 8 percent gross domestic product (GDP) growth in 2007 compared with 2.5 percent for advanced economies.

Higher living standards and more flexible exchange rates have made people more comfortable about borrowing, even if the benefits of a more developed financial system have yet to reach the most deprived in many of these countries.

But overall wealth has increased, with International Monetary Fund data showing growth per capita in India and China more than doubled in this decade compared with a 30 percent rise for the United States.

The change in emerging markets' landscape since the devastation of the 1997-1998 financial crisis is to a great extent a result of much stronger banking systems, analysts say.

Better capitalised banks, many bolstered by foreign ownership, have turned from mainly investing in government bonds -- lucrative when double digit interest rates were the norm in emerging markets -- to retail and investment lending.

"If you look at the one common thread between places like Ukraine, Nigeria, Brazil, China, India ... the emerging markets that are doing well, it is a rising investment-to-GDP ratio, it is rising credit-to-GDP ratios," said Bhanu Baweja, global head of emerging market currency research at UBS.