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Asia is lending itself to higher debt risks
Publication Date : 12-03-2013
As the United States and Europe fret over their huge government debts, a different kind of debt worry is surfacing in Asia.
Analysts are flagging the rise of lending levels in the region, such as bank loans and corporate bonds, as a growing concern.
Stable growth, strong bank deposits and global low interest rates are fuelling what is seen as a potentially risky appetite for lending among banks on the one hand, and for debt among individuals and companies on the other.
Borrowings as a proportion of the overall economy in Asia apart from Japan have already shot past the peak that prefaced the Asian financial crisis, suggesting that debt levels have risen relative to the ability to service them.
The risk of a country's growing dependence on such debt is that it becomes more vulnerable to economic and financial shocks. An economy with higher leverage is likely to see more business failures and loan defaults in a recession or if interest rates rise sharply, all else being equal.
Bank loans as a proportion of gross domestic product (GDP) have reached an all-time high in Asia excluding Japan, surpassing the peak prior to the 1997 Asian financial crisis, said HSBC economist Frederic Neumann.
That is troubling because a poorly supervised lending boom in Asia had contributed to the 1997 crisis, by making the region's banking sector more exposed to the subsequent plunges in asset and currency values.
Including bonds - a rarity in the 1990s but having sold in record levels in recent years - the measure of debt would be even higher, Neumann added.
This is worrying as the rise in credit is outpacing the growth in economic output, he said. "In short, more and more debt is needed to generate one percentage point of GDP growth."
To restore balance, Asia's economies need to keep stepping up productivity, Neumann said. In the meantime, as long as loose monetary conditions in the developed economies continue to spur global funding and keep borrowing costs low, the region's leverage is likely to grow even more this year, he added.
Outpacing the region
Witjin Asia, Singapore is one of the countries seeing both higher levels of and faster growth in private sector lending.
In terms of average debt to GDP, Singapore comes second after China among major emerging Asia economies, said Goldman Sachs analyst José Ursúa in a recent note.
China's credit was 127 per cent of GDP last year, on average, while Singapore's was 115 per cent, he said. Malaysia and Thailand logged debt of about 110 per cent of GDP on average last year.
South Korea's ratio was 99 per cent, India's was 51 per cent and that of the Philippines and Indonesia was around 30 per cent.
In response to queries from The Straits Times, the Monetary Authority of Singapore (MAS) said that as of the fourth quarter last year, Singapore's private sector domestic debt-to-GDP ratio was 118 per cent.
Not only are Singapore's absolute lending levels high, but they have been growing faster recently than most of its neighbours'.
Among Asian countries, Singapore and Thailand have seen the steepest year-on-year rises in their bank credit to GDP ratios over the last two years, according to Johanna Chua, Asia-Pacific chief economist for Citi.
Homing in on debt worries
In Singapore, concern over credit levels has mainly manifested in worries over property debt.
DBS economist Irvin Seah notes that mortgage loans are at an all-time high, as a proportion of both the overall economy and of total deposits.
"The property market is the new safe deposit box for Singaporeans," he said. "This implies rising risk exposure of the banking system and of the entire economy to the property market."
According to the MAS' latest financial stability review, property-related exposure made up 46 per cent of domestic loans extended to non-bank entities as of September last year.
But this was down from the average of 48 per cent since 2004, and the growth in such lending had moderated over the last year.
On a household level, the trends are more worrying. Household assets grew by 7.8 per cent year-on-year in the third quarter of last year, but household debt grew by a bigger 10.4 per cent, driven largely by housing loans.
This has led to Singapore's household debt to GDP ratio topping the eight Asian economies surveyed in the MAS' review as of September last year, including South Korea, Thailand, Indonesia, Taiwan, Hong Kong and China.
Should interest rates rise, buyers who have over-extended themselves on mortgage loans would be hit, especially since the "vast majority" of home loans in Singapore are based on floating-rate packages, the MAS said.
If mortgage rates go up by 4 percentage points, the mortgage-servicing ratio for the average household will increase by 13 percentage points, it added.
Take a person with a mortgage rate of 2 per cent, who is spending 30 per cent of his income on loan repayments. If his mortgage rate shot up to 6 per cent, he would then need to pay 43 per cent of his income to cover the increased payments, this indicates.
Worries over rising property- related indebtedness prompted the MAS to impose tighter home loan limits this year, including loan caps and higher cash downpayments on second or subsequent mortgages, and curbs on mortgage-servicing ratios for HDB flat loans.
Rumours have also surfaced that similar mortgage-servicing ratio limits are in the works for private home loans.
The good news - so far - is that while analysts are sounding an early alarm on the rise in debt, they do not think it has reached a dangerous point.
Chua noted that rapid credit growth and a higher- than-usual rise in debt to GDP "do not always lead to some form of systemic banking crisis".
But research shows that more often than not, credit booms are followed by an extended period of below-trend growth, she said.
"We think this potential for a subpar growth outcome is a risk factor we need to watch in Asia."
Standard and Poor's credit analyst Tan Kim Eng also noted that debt to GDP ratios may sometimes overstate financial risk.
In financial hubs such as Hong Kong and Singapore, many companies invest abroad using domestic loans, but the value created by their investments is not included in domestic GDP. That tends to overstate the debt to GDP ratio in these economies.
Total credit extended in the region to non-bank entities also remains lower than that in most parts of Europe, and Asian lenders have more diversified credit risk than their counterparts in Ireland and Spain, Tan added.
Still, he warns that a marked slowdown in economic growth in the region could expose current weaknesses associated with the recent ramp-up in debt growth.
If growth in China slows sharply before that in the developed economies pick up, Asia's economic activities will be adversely affected and loan defaults may start to rise, said Tan.
"More than before, continued economic and financial stability in the Asia-Pacific will require greater awareness of the risks," he said.
"Otherwise, we could find the credit crisis complete its global tour by revisiting the region."