Asia’s Rising Debt Brings Back Memories of 2007

October 31, 2013, 3:17 AM

Asia’s Rising Debt Brings Back Memories of 2007

NATASHA BRERETON-FUKUI

With debt levels rising across Asia in an era of easy money, many observers have asked if the region is facing a repeat of the 1997 Asian financial crisis. Perhaps a more relevant question is whether it’s 2007 all over again. A report this week by Standard & Poor’s Ratings Services notes similarities between Asia’s rising household debt – fueled by waves of cash unleashed by quantitative easing in the developed world — and the excessive private-sector borrowing that helped trigger the U.S. subprime mortgage crisis and a global recession.Banks in Malaysia and Thailand are particularly vulnerable to the buildup in household borrowing, S&P said, due to rapid growth in debt, relatively low incomes and banks’ significant exposure to auto, personal and unsecured loans, which tend to have a higher risk of default.

The report noted that household debt levels are also high in Singapore and South Korea, and warned that rising property prices in China and Hong Kong could hurt the quality of mortgage credits.

“As long as interest rates and unemployment rates remain low, we don’t expect any serious debt problems in Asia,” Ivan Tan, S&P’s director of Asian financial services ratings, said in an interview after the report was released Tuesday. “But as and when they do go up or if economic growth slows, countries like Thailand will be at risk of higher credit losses.”

In fact, growth is slowing already. The Bank of Thailand last week cut its economic growth forecast for this year to 3.7% from 4.2%, and lowered its 2014 projection to 4.8% from 5.0%. It also cited uncertainty about the timing of the U.S. Federal Reserve’s eventual monetary tightening as a key downside risk to growth.

“There is no sign of stress with respect to defaults yet, but the high level of household debt coupled with the fact that growth has slowed sharply and rates have likely bottomed is indeed worrisome,” said Taimur Baig, chief Asia economist at Deutsche Bank.

S&P noted that nonrecourse laws in the U.S., which allowed mortgage holders who got into financial difficulty to simply hand over their property to the bank, marked a crucial difference from the situation in Asia.

Policymakers around the region are aware of the risks. Governments in Hong Kong, Indonesia, Malaysia, Singapore and Taiwan have taken steps to curb mortgage lending and cool housing markets. Indonesia has set limits on loans for vehicle purchases, while Malaysia has sought to make it harder for consumers to accrue credit-card debts.

Those targeted measures have had some success, but in a number of Asian countries, private-sector borrowing has continued to mount.

The increase in household debt has been especially precipitous in Thailand, where it had risen to 77.1% of gross domestic product by 2012 from 55.6% in 2008, according to S&P. The climb was almost as fast in Malaysia, to 80.5% of GDP in 2012 from 60.4% in 2008.

Loan growth in Thailand has been driven by government incentive schemes for first-time car and home buyers that aimed to support the economy after a recession in 2009 and severe flooding in 2011.

Bank of Thailand data for the second quarter, the latest figures available, show that growth in consumer lending slowed to 19.5% from 21.3% in the first quarter. Non-performing loans ticked up slightly but remained stable at 2.2% of total loans.

Somewhat more worrying was a pickup in the proportion of special mention loans – loans that are one to three months in arrears, which serve as a leading indicator for default trends – largely due to car loans. But the move was very modest, rising to 2.2% of the total from 2.1% in the previous quarter.

After warnings from the central bank earlier this year about the risks posed by rising household debt, some Thai banks have raised their capital buffers.

Still, analysts point out that commercial banks provide only around two-fifths of lending to households; the rest comes from the non-bank financial sector, including specialist financial institutions and savings cooperatives, which are less tightly regulated and harder to track.