Asia’s credit explosion
Whatever is happening to all those Asian savers? Apparently they are turning into big time borrowers.
RBS contends in a note today that in a swathe of Asian countries (they exclude China and South Korea) bank deposits are not keeping pace with credit which has expanded in the past three years by up to 40 percent.
Some of this clearly is down to slowing exports and a greater focus on the domestic consumer. Credit levels are also rising overall in these economies because of borrowing for big infrastructure projects. But there are signs too that credit conditions are too loose.
Hong Kong, Singapore and Thailand are the three countries where credit is expanding most rapidly, according to RBS. And in terms of household indebtedness, ratios in Hong Kong, Malaysia and Singapore now exceed 65 percent of GDP (that’s not terribly far off US households’ debt-GDP ratios of around 80 percent)
RBS analysts acknowledge that these levels by themselves do not seem daunting. But they warn:
What is however worrying is the pace of credit growth. …The combination of rapid credit disbursals and more importantly, the on-going divergence between credit disbursals and GDP growth implies that the system is becoming more vulnerable to income and interest rate shocks.
The analysts cite the example of Singapore where household liabilities rose to 74 percent of GDP from 61 percent in the 2008-2012 period. The corresponding increase in household wealth was almost entirely concentrated in property, leaving households exposed to a decline in property prices or higher interest rates.
There are other potential consequences too. The rise in borrowing comes at a time when labour productivity across much of Asia is declining (see graphic). This divergence eventually will hit the region’s balance of payments — India, Indonesia and Thailand are already deficit countries while Malaysia’s surplus has fallen sharply. Second, the rise in credit is impacting banks’ loan-deposit ratios (see graphic).
Signs are that savings rates are declining while there has also been a shift away from buying financial assets into gold or real estate — low interest rates are an effective deterrent to savers. RBS says:
This diversion…implies that unless deposit growth picks up, the current pace of credit growth can not be sustained. For deposits to rise, deposit rates need to rise and in real terms. The mismatch between lending and deposits also implies monetary tightening has been insufficient.