Heavy debt weighs on Southeast Asian consumers; Betting on Asean growth may have become questionable

August 20, 2013 3:20 pm

Heavy debt weighs on Southeast Asian consumers

By Jeremy Grant

Betting on Asean growth may have become questionable

When Dhanin Chearavanont, Thailand’s richest man, committed this year to buying back a domestic discount store chain he once owned, it was clear he wanted it very badly. Mr Dhanin’s offer represented a whopping 44 times expected 2013 profits at Siam Makro, which is now a unit of Charoen Pokphand, Thailand’s largest agribusiness and food company of which he is chairman. The big idea was to expand the Makro concept of membership-only, cash-and-carry stores out of Thailand, where it has 57 stores, and across Southeast Asia, to take advantage of the region’s rising middle class. We hear a lot about the middle class in the countries of the Association of Southeast Asian Nations these days. As a way of describing how people are being lifted from rural poverty by moving to higher-paying jobs in cities, where they buy microwaves and kitchen utensils, it points to a trend. But betting too heavily on it may have become a questionable exercise, for two reasons.First, as HSBC’s Frederic Neumann argues, consumption in Asia has not been anywhere near as robust as people think. In Indonesia, Malaysia and Singapore, the ratio of consumption to gross domestic product is below a 55 per cent level that he considers appropriate. Increasing income inequality suggests that for the average person in the street their purchasing power has not risen as much as headline GDP growth would suggest.

Now, we have sudden shivers being felt by emerging Asian economies added to the mix. This week the currencies of Indonesia and Thailand have sold off sharply over concerns about balance of payment weakness.

Exports from both countries, the two largest economies in Asean, are suffering from the Chinese slowdown. For a region that not long ago was touted as the last bright spot in a wobbly global economy, things are not looking quite so rosy.

But the big worry is credit growth, fuelled largely by the provision of cheap money from central banks in the west. With the tide about to go out on that, the naked swimmers are being exposed. That will have consequences for companies exposed to the debt-fuelled consumer spending story. In Thailand alone, Capital Economics reckons that private sector debt as a share of gross domestic product has been mainly driven by consumption, which it considers unsustainable.

Personal consumption loans have grown by an average of 17 per cent, year-on-year, in Thailand. Households are now trying to sustain debt payments equivalent to 33.8 per cent of their income. Before the 2008 financial crisis the equivalent figure for the US was very roughly half that.

Not surprisingly, shares in companies exposed to consumer goods have taken a hit, including Matahari, Indonesia’s largest operator of department stores. It describes itself on its website as providing “the growing Indonesian middle classes with the latest in fashion trends”.

Religare, another research firm, says that corporate Asean is expected to register only 3.5 per cent earnings growth for the full year, with “particular weakness” in consumer staples and property. Oversupply in palm oil, a key food ingredient and a major commodity export of Indonesia and Malaysia, will not help either.

This may show that people were too optimistic about consumption in the region. Slower growth in China is expected to weigh on Asean too. As Religare says, “Asean is supposed to be the growth market . . . but where is the growth?”

Funding costs for borrowers in the foreign currency bond markets have become more expensive since May when the Fed signalled the beginning of the “taper”.

Fewer companies are tapping the foreign currency bond markets. Figures from Dealogic show the total value of such corporate bonds issued between May and mid-August in Asia outside Japan is $5.9bn, a third lower than in the same period a year ago.

Admittedly, bank lending shows little sign of slowing, and may even make up any shortfall in corporate bond activity. And unlike during the Asian currency crisis of the late 1990s, balance sheets are in far better shape this time.

But rising corporate bond yields and declining issuance will ultimately hurt corporate profits. And if the slowdown in Asean economies is sustained, ultimately consumer spending will slow.

We are not there yet. But one gauge of how this plays out could be how aggressively Siam Makro expands in the region. Don’t bet on it moving that fast.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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