South-east Asia set to outgrow debt burden

The economies of south-east Asia are looking forward to a healthy growth in 2024 of between 3 per cent and 6 per cent. This increase should help lower the steadily rising debt-to-GDP ratio seen in the region, without requiring huge reductions in borrowing by governments and corporates.

While most governments appear to have survived the Covid-19 pandemic with their sovereign ratings intact, the region remains highly vulnerable to geopolitical risks. Meanwhile, corporate debt, high by global standards, is primarily held by large conglomerates which can expect favourable terms from the region’s still-robust banking systems. However, this comes at the price of less lending to small to medium-sized enterprises, which were hardest hit by the pandemic.

Public, corporate and household debt has been on the rise in the 10 member countries of Asean, the Association of Southeast Asian Nations, and their three main strategic Asian partners — China, Japan and South Korea (Asean+3) — since the global financial crisis, spurred on by the post-crisis low interest rate environment that encouraged borrowing. Government debt was further increased by the monetary and fiscal stimulus measures undertaken during the Covid-19 pandemic to ease corporate and societal suffering amid the drastic economic slowdowns seen between 2020 and 2022. 

According to the Asean+3 Macroeconomic Research Office (Amro), set up in 2011 to provide economic surveillance of the region, the total debt-to-GDP ratio in Asean+3 — including corporate, household and public debt — peaked at 325 per cent in 2021 and declined slightly to 299 per cent in 2022. The ratios were generally lower in Asean than in the more developed economies of China, Japan and South Korea.

“In 2023 the ratio should be lower, but I don’t think it will go down drastically as some of the debt is a stock thing,” says Kevin Cheng, Amro’s lead economist. Public and corporate debt are likely to fall further in 2024. “Firstly, the economies are picking up so GDP is higher, so you have a higher base. Secondly, interest rates are higher, so that dampens financing,” says Cheng.

Asean, with the exception of members Laos and Myanmar, has done a decent job in battling inflation. “The average inflation in the 10 Asean countries is expected to fall from 8.2 per cent in 2022 to 4.5 per cent in 2024. Excluding Laos and Myanmar, it will be closer to 2.8 per cent in 2024,” says Cheng. 

With inflation falling and the US Federal Reserve likely to lower interest rates at some time this year, the tight liquidity situation is expected to ease in the region. “We think inflation is going down, which means central banks can lower interest rates, so the baseline is lower inflation, and lower interest rates,” predicts Cheng.

Public debt easing 

The Asean economies survived the Covid period with its sovereign ratings largely unchanged, with the exception of Laos and Malaysia, two countries that had accumulated large debt burdens prior to the pandemic. In 2020, both Fitch Ratings and Moody’s downgraded Laos’s credit rating below CCC, which was already below investment grade. Both rating agencies have since withdrawn their rating service on the communist country, which has been issuing commercial bonds in Thailand and Singapore since 2013. Laos has yet to default on any of its commercial bonds.

“Laos now has 60 per cent concessional loans and 40 per cent commercial market term loans,” says Adisorn Singhsacha, CEO and founder of Twin Pine Group, a financial advisory boutique that arranged most of Laos’s foreign bond launches. “Of this 40 per cent, some 7 per cent to 8 per cent is in bonds,” he says. 

Most of Laos’s commercial loans are from Chinese banks, mainly for hydroelectricity projects, mining and the $6bn railway link between China and Laos. The IMF estimates Laos’s public debt at 122 per cent of GDP in 2023, or about $12.2bn. Fitch has estimated that Laos will need to make $1.2bn to $1.4bn on debt repayments between 2023 and 2028, a considerable amount for a country with GDP of $19bn. Chinese banks have been deferring payments on some of their loans to Laos since 2020, and Beijing is likely to encourage them to continue doing so at least in 2024, when Laos is hosting the Asean summit.

In December 2022, Fitch also downgraded Malaysia’s credit rating from A-/negative outlook to BBB+/stable outlook, citing the impact of the Covid pandemic that forced the government to spend heavily on relief programmes, hiking the public debt to one of the highest in the region.

“The main reason [for the downgrade] was a deterioration in the outlook for Malaysia’s fiscal finances,” says Thomas Rookmaaker, head of Asia-Pacific sovereign ratings at Fitch. He notes that Malaysia has undergone a lengthy period of political instability with several government changes, which has likely led to higher expenditures as coalition partners vied for budget share. “The political situation led to fiscal deficits, which would have probably been lower in a more stable political situation,” says Rookmaaker. Fitch places the public debt-to-GDP ratio in Malaysia at 70 per cent, which is relatively high for the region. 

Another Asean country with a relatively high public debt-to-GDP ratio is Thailand. Fitch places the ratio at 55 per cent, but the Thai government’s estimate is closer to 62 per cent. Thailand upped its debt ceiling from 60 per cent to 70 per cent during the pandemic to allow for a hefty relief package that prevented a jump in people living in poverty and postponed defaults. Public debt will rise further this year if the government of Thai Prime Minister Srettha Thavisin succeeds in pushing through a Bt500bn ($14bn) handout for 50mn Thais by mid-2024. “The handout is something that we are closely watching in the sense that there is still quite some uncertainty about how this is going to be financed, and what kind of impact this will have on the fiscal metrics,” says Rookmaaker.

Most analysts are not too worried about Thailand’s growing debt because it is still relatively low, by global standards, and the country is flush with foreign exchange reserves. With or without the handout, Thailand’s GDP is expected to grow 3 per cent to 4 per cent in 2024, driven mainly by a recovery of the tourism industry, which will further boost foreign exchange reserves and the current account surplus. “For Thailand, Malaysia, Singapore and the Philippines, they all have rather healthy external balance sheets,” says Andrew Wood, sovereigns analyst at S&P Global Ratings. “Malaysia and Thailand issue [bonds] primarily in local currencies, and they have supportive capital markets for that,” he adds.

The Asean region has been actively deepening its capital and bond markets since the 1997 financial crisis, which saw local currencies plummet at a time when governments and corporations were highly leveraged in US dollar borrowing. Most have learned their 1997 lesson, and shifted borrowing onshore. Thailand and Malaysia, with slightly more developed economies and wealthier populations, have succeeded in keeping most of their current public and corporate debt in local currencies. The Philippines and Indonesia still have a way to go, but they are far from dangerously leveraged in US dollar debt.

“Indonesia is less dependent on foreign investors than they used to be, prior to the pandemic,” says Rookmaaker. “One issue, pre-pandemic, was that foreign investors held a large share of the local currency government securities. So, in 2019, foreign investors held close to 40 per cent, but that has gone down drastically, for two reasons: there were outflows during the pandemic and then the total debt also increased, so as a share of the debt it has become smaller.” The story is similar for the Philippines.

Fitch upgraded its rating for Vietnam in December 2023, while S&P had done so in 2022, partly because the government avoided a hike in public debt during Covid, and the economy can look forward to at least 6 per cent growth in 2024. Singapore has the highest public debt-to-GDP ratio in the region at 168 per cent, but the lion’s share of that is to government investment funds such as Temasek and GTC. The government real debt-to-GDP ratio is more like 37 per cent, and they keep that in place just to create a debt market benchmark, analysts say.

Corporate debt more of a worry 

While Asean’s public debt levels are seen as manageable, the region’s high corporate debt has raised concerns about rising defaults and the crowding out of smaller firms by the national giants. Amro estimates Asean’s aggregate corporate debt at 80.7 per cent of regional GDP as of March 31 2023, which is deemed high by global standards. “If you look at corporate debt, it is higher as a region, but fortunately most of the corporate debt in the region is to big firms, and those bigger firms tend to have deeper pockets and higher resilience, so overall it is okay,” says Amro’s Cheng.

Thailand and Vietnam stand out in terms of the rapid rise in corporate debt since the Covid pandemic. “In Vietnam, as a proportion of GDP, corporate debt to GDP is approaching 75 per cent to 80 per cent, compared with 70 per cent pre-Covid, so there has been a big jump there,” says Xavier Jean, managing director, corporates for S&P Global Ratings in Singapore. 

“The other fairly large jump is in Thailand, which went from 75 per cent pre-Covid, to 87 per cent now,” he adds. “In the US, for the same kind of data, it is about 75 per cent, so these two countries, with substantially lower GDP figures, have the same corporate debt leverage-to-GDP ratio as the US, which is a much bigger, wealthier and diversified economy.” 

Indonesia’s corporate debt to GDP has fallen from 26 per cent pre-pandemic to 23 per cent in 2023, while the Philippines has stayed steady at 60 per cent. Malaysia’s number has fallen from 100 per cent to 90 per cent, but some of that is due to multinational companies based in the country. 

Vietnam’s corporate debt, especially in the property sector, has been in the spotlight since the default of NovaLand Group on some of its bond repayments in 2022. Credit rating agencies have been keeping a close watch on VinGroup, a leading Vietnamese property developer and also the owner of VinFast, a fledgling manufacturer of electric vehicles, which has amassed billions of dollars in debt over the past three years. “The default or restructuring of NovaLand in Vietnam was a mini-Country Garden moment for Vietnam,” says Jean, referring to the giant Chinese real estate company that is verging on defaulting on its massive $186bn debt. “If the situation becomes more tight for VinGroup, that could trigger a full scale-Country Garden moment, but this is highly hypothetical.”

Most analysts now believe the VinGroup will survive but the worries highlight the difficulties in monitoring Vietnamese companies. “We are extra vigilant about Vietnam because the financial disclosure and transparency is quite a bit behind other regional markets, so if things go badly the contagion effect might be more significant than in other markets, because people don’t know and things can become more sentiment-driven,” says Willie Tanoto, a banking analyst at Fitch Ratings in Singapore.

The same worries could be raised in other Asean economies, which tend to be top-heavy with large conglomerates. “I think today we have to understand, hypothetically, what would happen to the ecosystem of the financial system and the ecosystem of investors’ sentiment if one of those very big conglomerates — whether in Vietnam, the Philippines, Indonesia, or Thailand — were to experience financial difficulties,” says Jean. 

So far, instead of shying away from such a hypothetical scenario, Asean banks appear to be concentrating their lending more on the big Asean conglomerates, and neglecting the riskier SMEs, analysts say. “The trend we are seeing is that the banks are rebalancing their books, and there has been a heavy emphasis on blue chips, large corporations and [state-owned enterprises] as well,” says Ivan Tan, banking sector analyst at S&P Global in Singapore.

In the Philippines, for example, the banks’ lending portfolios are around 80 per cent corporates, and hardly any retail, notes Tan. It is not necessarily a good environment for the banks. “The top 10 conglomerates dominate the whole sector, so it is very hard to price higher interest rates with these conglomerates because everyone wants to lend to them,” says Tan. 

In countries such as Thailand and Malaysia, which have deeper, more mature capital and bond markets, there are more avenues for the smaller corporations to raise money, but the pool is a lot smaller in Indonesia, the Philippines and Vietnam. “The issue both in Indonesia and Vietnam is [that] the size of their domestic capital market is relatively tiny, so it is difficult for those companies to rely solely on the domestic market,” says Jean. “I think the issue is, in all the developing markets — or emerging markets — the domestic capital markets are pretty much cannibalised by the big companies.”

Even in Thailand, there are limits to what the domestic bond market can absorb, especially at a time when investors are becoming increasingly cautious about their bond investments after a number of defaults. Of course, the large Thai conglomerates, already favoured by the Thai banks, will have no difficulty issuing bonds. “It’s a bit of a vicious circle, because good corporations will still be able to raise money on the bond market and they are who the banks want to lend to,” says Tania Gold, banking analyst at Fitch Ratings in Singapore. 

Nothing like growth

The good news for both public and corporate debt in Asean is that the region is still a growth story, at least for 2024, and probably for 2025. “For Asean, the growth rates are all relatively high,” says Fitch’s Rookmaaker. “If you look at sovereigns in the BBB category — Malaysia, Thailand, Indonesia and the Philippines — they all have better growth outlooks than their peers in other regions. It’s still a high-growth story in Asean, and that’s important. If you have high growth, that helps in a country’s public sector debt dynamics.”

Amro’s Cheng agrees. “The best way to deal with your debt problem is to grow out of it,” he says.