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.