Has Asia's Debt Risen Too Quickly?
Debt has ballooned in developing Asia following the 2008-2009 global financial crisis, supported by plentiful global liquidity. With the US Federal Reserve about to raise interest rates, data from the Asian Development Outlook 2015 gives a clearer picture about the possibility of a credit slowdown in the region.
Debt has ballooned in developing Asia following the global financial crisis of 2008–2009, supported by plentiful global liquidity. With the US Federal Reserve on the cusp of raising interest rates, it’s highly likely that there could be a credit slowdown.
Has Asia’s debt risen too quickly to cope? It certainly has risen fast in most countries.
To get a clearer picture of the situation, the Asian Development Outlook 2015 gathered data on domestic bank loans and outstanding local currency bonds in 14 large Asian economies. Data show total debt almost doubled from $18.3 trillion to $34.1 trillion between 2009 and 2013. Growth in debt has considerably outpaced that of GDP, pushing the ratio of debt to GDP from 195% in 2009 to 214% in 2013 – a jump of almost 20 percentage points.
In part, the growth reflects development of the financial sector, and as such, growth in debt can be seen as supporting economic growth. However, the largest increases in debt as a share of GDP occurred in economies that already had relatively well-developed financial sectors which were well placed to quickly to take advantage of increased flow of funds into the region and ramp up lending. When lending rises quickly, lending standards tend to become relaxed, which can lead to excessive leverage and asset price bubbles which has happened several times in the past.
Change in debt as a share of GDP, selected Asian economies (%). Source: IMF IFS, Bloomberg LP, CEIC
One way to ascertain whether credit growth is too high is to compare a country’s debt level to its historical trend to see if it exceeds a threshold derived from that. This allows us to take into account financial deepening in each economy. Using this methodology, we found six episodes of excessive credit growth between 2000 and 2013: People’s Republic of China (PRC) in 2003, India in 2003, Kazakhstan in 2007 and again in 2009, Sri Lanka in 2003, and Viet Nam in 2010.
In recent years, Malaysia, Singapore, and Pakistan have experienced rapid credit growth that brought their debt-to-GDP ratio close to the threshold that defines a credit boom. In Pakistan, this seems to largely reflect government borrowing, but in Malaysia and Singapore the rise was on the back of increased households and corporate borrowing. The PRC saw its debt approach the threshold in 2009, but slower credit growth since then has brought its ratio of debt to GDP back closer to the trend.
In short, then, while total debt has risen quickly in Asia, it does not pose a threat to growth in the near term. Rapid growth in credit has been concentrated in economies with more developed financial sectors which are relatively well prepared to manage it.
Still, policymakers should be alert and ready to deal with the impact of tighter liquidity.
They face a difficult choice. Higher debt can facilitate faster growth but it also threatens to fuel asset bubbles and deepen any subsequent crisis. Housing price data in the region are limited, but where available they show the rise in debt accompanied by higher property prices.
Change in total debt and housing prices, 2009–2013
With inflation low, governments have been quite reluctant to raise rates to slow credit growth. And interest rate hikes are not without risk anyway since higher borrowing costs could push vulnerable companies into default or encourage domestic borrowers to seek funds in foreign currency, bringing currency risk. Macroprudential policies such as capital and liquidity requirements, limits on the growth and composition of credit, and restrictions on the type of borrowers allowed access to loans are one way of targeting a specific sector without wide-ranging side effects on other parts of the economy.