Asia’s ballooning debt
Could Asia be headed for a debt crisis?
The very thought may seem ludicrous given the region’s mighty current account surpluses and brimming central bank coffers. But a note from RBS analysts Drew Brick and Rob Ryan raises some interesting concerns.
Historically speaking, most EM crises have been borne on the back of excessive capital inflows, Brick and Ryan write. And in many Asian countries, the consequence of these flows has been over-easy monetary policy that has left citizens and companies addicted to cheap money. Personal and corporate indebtedness levels have spiralled even higher in the past five years as governments across the continent responded to the 2008 credit crunch by unleashing billions of dollars in stimulus.
First, some numbers and graphics:
a) Asia’s current account surplus stands now around $250 billion, less than half its 2007 peak as exports have slumped.
b) The 10 biggest Asian economies have a hard currency war chest of around $5 trillion. Sounds great. But the following graphic demonstrates the slowdown in the pace of reserve accumulation.
What worries the RBS analysts is that the decline in reserve growth and surpluses coincides with a debt issuance boom. JP Morgan’s EM debt indices, where Asia accounts now for 20 percent of the listed dollar and local currency bonds, reflects this explosive growth. A few years ago, Asia’s share was close to zero.
On the face of it external debt levels don’t look like anything to worry about. South Korea for instance has gross external debt at 40 percent of GDP — compare that with 140 percent in Hungary or 70 percent in Poland. But gross external debt has risen sharply since 2007 — in China it stood at $785 billion by mid 2012, compared with $373 billion in 2007. Indonesia’s has risen to $240 billion from $134 billion and Thailand’s external debt is at $118 billion compared to $74 billion, RBS points out.
And if one were to tot up corporate, financial and household debt, the picture in many countries looks frightening, they say. In China for instance it tops 200 percent of GDP, they estimate, a consequence of the government’s 4 trillion yuan stimulus in 2009 (look at the following graphic). And non-financial corporate debt to GDP levels in China and South Korea are higher than in the euro zone and the United States:
The marginal downdraft in the pace of reserve accrual appears to be coming just as private-sector credit provision buckles under the outsized level of microeconomic debt in various benchmark regional ports of call.
Still, a crisis does not look imminent, given the size of Asian reserve buffers, high household savings rates and above all, investors buoyant appetite for Asian assets. Brick and Ryan point out:
Breaks in the flow of capital have always played an outsized role in creating EM debt crises – and capital flow reversals can come suddenly and inexplicably; with a bang, not a whimper.
Moreover, if a crash were indeed to come, the bigger victims could be foreign investors. Policymakers who have become accustomed to erecting barriers to keep speculative cash out of their markets, could resort to measures to prevent foreign cash from fleeing.
To-date, the focus of the market has been on these controls as barriers to arbitrage from inflows. But might the controls have a back door as well as
a front door – ready to slam shut to keep cash onshore in a time of need?
Is it any wonder we find it so hard to sleep at night sometimes?