The World Bank has flagged up a cultural shift in Asia from saving to spending. Anthony Rowley looks at the implications.Politicians, trades union leaders and economists have long complained that Asian consumers do not consume enough and consequently Asian exporting nations have run up huge current account surpluses. Now that some Asians are acquiring a taste for consumption, those surpluses may dwindle but fresh problems are appearing in the shape of credit bubbles.
South Korea was the first east Asian nation to suffer a boom and bust in consumer credit after the 1997 financial crisis, when its banks swung from lending to highly indebted corporates to financing house sales, automobiles and household goods. The “Western disease” has since spread to south-east Asia.
In its latest economic update on east Asia, the World Bank addresses the “emergence of the Asian consumer” – a development that policy makers ignore at their peril. Not only does it denote a cultural shift from saving to spending among some Asians, it also implies they are getting used to living on credit.
Traditionally, east Asians had the highest savings rates in the world, accumulated through decades of post-war reconstruction and in playing catch-up with Western nations. These savings financed investment and made the region the industrial powerhouse it is today. The bulk of savings were directed through the banking system, which lent (and frequently over-lent) money to the corporate sector. Capital markets remained underdeveloped and so did the consumer finance sector.
Habits are changing
But things are changing. Robust household consumer spending underpinned economic growth in the region during the 2001 export slowdown. It also helped economic recovery in 2002. Spending has remained strong this year, except in Hong Kong and Taiwan, which were hit by high unemployment and factors such as SARS.
What the World Bank terms the consumer “revival” is supported by historically low real interest rates and a major expansion in lending to households. Regional lenders traditionally paid little attention to consumer financing but, says the bank, they have pursued it vigorously in the wake of the regional financial crisis. Banking sector reforms and foreign entry into the sector have also boosted consumer finance.
This is a mixed blessing, as seen in South Korea where total household debt has risen to more than 100% of disposable income and credit card delinquency ratios have risen to 12%, while aggregate loan-loss provisions in respect of consumer financing have risen from 1600bn won in 2001 to more than 4000bn won ($3.3bn) now. Nine credit card companies in South Korea recorded a combined net loss of 262bn won last year (compared with an aggregate profit of 2500bn won in 2001) due to increased provisions on extended loans and rising defaults on credit card payments.
Regional trend
South Korea is credited with having solved its banking sector problems fastest among the nations worst-hit by the 1997 crisis. But its banks may have swapped overlending to corporate borrowers for a consumer credit boom. Banks in other parts of the region may follow suit. In 2002, consumer credit in Thailand (other than housing finance) rose by 40% in 2002 while in Indonesia consumer credit expanded by 37%. The share of households in east Asian bank lending overall is estimated by the World Bank to have “surged” from 27% in 1997 to around 40% now.
“If the role of public spending has been gradually pulling back then that of the private sector has been coming forward,” says the World Bank. “This is most apparent in the emergence of the Asian consumer as an increasingly important mainstay of economic activity. As macroeconomic conditions have improved, central banks have gained the flexibility to implement very supportive monetary policies, resulting in low real interest rates. Efforts to recapitalise and restructure the financial sector have been successful enough for banks to foster the emergence of new consumer credit markets.”
Broader, deeper consumer credit markets are generally positive for long-term economic development, as they counteract a perceived overdependence by many Asian economies on external demand and export markets. But banks must be risk aware so that growth in consumer credit does not become excessive.
