15 privatizations, but only by about 1-1.5 percent of GDP. This small decline reflects both the smaller role of state enterprises in Latin America, compared to the Transition economies, and the small size of the banking sector (relative to GDP) in Latin America. In East Asia, credit to public sector enterprises rose slightly as a percentage of GDP after the crisis, but remained small.

The large size of the decline in the Transition economies roughly offset the rise in credit to government and the central bank that they experienced. In Latin America, the fall in credit to public enterprises was too small to offset the rise in credit to government, particularly in Brazil and Mexico, where the rises in bank holdings of government debt were very large as a result of the bank restructurings.

# **D.   Bank Credit to the Private Sector**

Credit to the private sector has been recognized as a key element in banks’ contribution to growth.<sup>31</sup> However, from 1993-2000, bank credit to the private sector increased from 32.5 percent of GDP to only 35.1 percent of GDP, on average in the 18 countries reporting this data (Figure 6).<sup>32</sup> On average, bank credit to the private sector rose relative to GDP up to 1997 and then declined, even while bank deposits continued to rise as discussed in Section II. For the whole period 1993 to 2000, twelve of the 18 countries experienced a rise in bank credit to the private sector, as a percentage of GDP, while 6 experienced an absolute decline.<sup>33</sup> Between 1997 and 2000 credit to the private sector rose in only half the countries, largely because of bank crises and restructurings.<sup>34</sup> Finally in terms of intermediation, the ratio of private credit to deposits fell in 11 of the 18 countries between 1993 and 2000.

The slow growth of average private sector bank credit in these countries largely reflects the restructurings. It also reflects the slow growth in the ratio of deposits and capital to GDP (7 percentage points of GDP) in these countries<sup>35</sup> and the rise in banks’ net holdings of central bank debt and foreign assets. The restructurings removed large amounts of non-performing, private credits from bank balance sheets, notably in Brazil, Indonesia and Mexico, as discussed in Section III.2.

Excluding these three crisis countries, private sector credit performed much better. In the remaining 15 countries it rose from about 28 percent of GDP in 1993, on 31 See for example, Levine and Zervos, 1998, Beck, Levine, and Loyaza, 2000, and Levine, Loyaza, and Beck, 2000, for statistical evidence on the importance of credit to the private sector in growth and financial development. See also King and Levine, 1993. Simple correlations on data in the 1990s are consistent with these results, as discussed in Annex 1.

32 Footnote 30 lists the countries reporting private sector credit separately from public enterprise credit.

33 Brazil, Czech Republic, Indonesia, Mexico, Venezuela and Russia (which was roughly constant).

34 The countries in which private sector credit fell after 1997 are Czech Republic, Indonesia, Malaysia, Mexico, Philippines, Russia, Thailand, Turkey, and Venezuela.

35 China and Korea, two countries where deposits grew rapidly, are not included in this analysis because they do not report data on private sector credits separately. Note again that Brazil suffered a sharp drop in the deposit to GDP ration from 1993 to 2000 according to the IFS.