Analysts increasingly worried Asia is lending itself to higher debt risks
By Fiona Chan, The Straits Times/Asia News NetworkSINGAPORE -- As the United States and Europe fret over their huge government debts, a different kind of debt worry is surfacing in Asia.
March 14, 2013, 12:17 am TWN
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 fueling 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 1 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.
Within 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 Jose Ursua a in a recent note.
China's credit was 127 percent of GDP last year, on average, while Singapore's was 115 percent, he said. Malaysia and Thailand logged debt of about 110 percent of GDP on average last year.
South Korea's ratio was 99 percent, India's was 51 percent and that of the Philippines and Indonesia was around 30 percent.
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 percent.
Not only are Singapore's absolute lending levels high, but they have been growing faster recently than most of its neighbors'.
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.
In Singapore, concern over credit levels has mainly manifested in worries over property debt.