Fed rate hikes raise risks for Asian nations swimming in debt
Twenty years after the Asian financial crisis and a decade since the global credit crunch, the region is swimming in debt.
The debt binge is spread across companies, banks, governments and households and is inflating bubbles in everything from the price of steel rebar in Shanghai to property prices in Sydney. As the Federal Reserve raises borrowing costs, that means debt is again a concern.
Exposure to China’s slowdown, fluctuating commodity prices and currency volatility are just some of the risks. S&P Global Ratings estimates that of the almost $1 trillion in Asia corporate debt they rate that is due to mature by 2021, 63% of it is denominated in dollars and 7% in euros.
To be sure, there are sizable buffers too. Governments have strengthened their international reserves, hedging of risks has improved and deeper local bond markets offer alternative sources of finance. And while the Fed is tightening, ongoing massive monetary easing in Europe and Japan provides an offset. Interest rates remain low by historical standards and reflation is helping bring down servicing costs.
Still, the pace of borrowing is eye watering. A debt hangover in Asia matters because the region is the biggest contributor to global growth. Asia’s expansion will probably exceed 5% in 2017 and 2018, compared with about 3.5% for the world, according to the International Monetary Fund.
Here’s a look at the metrics in some of the biggest economies.
China’s total debt likely reached around 258% of the economy’s size last year, up from 158% in 2005. President Xi Jinping and his government have made curbing excessive credit and leverage a key priority this year though progress appears to be slow.
Much of the borrowing is at the corporate level, a sector that continues to be dominated by debt-laden state-owned enterprises, so-called zombie firms, with the IMF warning that China needs to urgently deal with company debt.
Then there’s local government borrowing and the murky world of shadow financing and off-balance sheet lending. There are already plenty of warning signals, with rising defaults of corporate bonds and the first-ever rating downgrade of a Chinese local-government financing vehicle.
After years of low rates and a property boom that help prop up the economy, South Korea has been left with a hangover.
Record household debt of 1,344.3 trillion won ($1.2 trillion) has reached a level where repayment burdens are hurting consumption, and Korean officials worry that low-income households may default as the Fed’s tightening impacts domestic lending rates.
The country is also among the most indebted in the OECD, with the ratio of household debt to disposable income at 169% in 2015, versus the 129% average.
Japan is one of the most indebted nations in the world, with a gross government debt burden that is more than 2.5 times as large as its economy. And the government itself sees no prospect that it will be able to reach its target of primary budget surplus in 2020, which would be the first step to stopping the growth in national debt.
However, the nation has substantial investments overseas and domestic assets, which reduce the debt burden on a net basis. In addition, most corporate debt and all government debt is denominated in yen, and the vast majority of the state’s bonds are held domestically, so there is a lower risk of capital flight.
Australia’s household debt-to-income is a record 189%—much of it in mortgages. In the past year the value of housing-related debt outstanding climbed 6.5%, compared with just a 3% gain in household income, according to central bank Governor Philip Lowe.
Meanwhile, annual wage growth is at a record low and consumer-price growth is weak, meaning Australians can’t inflate away their debts as they have in the past.
“Slow growth in wages is making it harder for some households to pay down their debt,” Lowe said in Melbourne 4 April. “For many people, the high debt levels and low wage growth are a sobering combination.”
The demand for debt comes from a scramble to finance property purchases in Sydney—up 105% since 2009—and Melbourne where prices are similarly skyrocketing. Part of the demand is driven by record-low interest rates, some by local investors seeking an easy return and to take advantage of tax breaks, and part of it is Chinese investors looking to park cash offshore.
Although smaller than in some other Asian nations, there are various interconnected debt problems in India. The government debt-to-GDP ratio is nearly 70%, much higher than similar BBB rated sovereigns, Fitch Ratings Ltd said in a report this month. And corporate debt is increasing, along with a rise in bad loans, which is causing risks for the banking sector.
Those bad loans mean the government has used taxpayer money to recapitalize state-run banks, but the amount is much smaller than what is needed. Fitch puts India’s recapitalization burden at $90 billion by 2019, while the government has committed only $10 billion in fiscal resources.
And with a narrow tax base, the government will have to fund those measures with more borrowing, raising the debt burden of the state.
Southeast Asian countries have relatively lower debt levels by Asian standards but leverage has increased in recent years with corporate and household debt becoming a particular concern in Thailand and Malaysia.
According to a recent Standard Chartered Plc report looking at the evolution of Asian leverage between June 2008 and June last year, Malaysia’s overall debt load rose to 240% of GDP, up from 173% of GDP. This is one of the largest increases of any country in Asia during the eight-year period, and leaves Malaysia, a middle-income nation, with debt on a par with the likes of Australia, the UK and Italy.
Singapore has the largest debt load in Southeast Asia, but the city-state is also one of the world’s wealthiest countries, with households holding assets worth $1.1 trillion under one estimate.
The Philippines and Indonesia have avoided the accelerating pace of leverage elsewhere, partly because of relatively less developed banking industries that make it harder for households to borrow. Indonesia also has strict fiscal rules in place, a legacy from past crises, that cap the annual budget deficit at 3% of GDP and total government debt at 60% of GDP.