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Asia-PacificApril 1 2016

Asia’s surging household debt: how risky is it?

Household debt in Asian economies has grown to account for as much as 90% of some countries' GDP. But is all Asian household debt equally risky? Stefania Palma investigates. 
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Soaring household debt in Asia is one of the starkest legacies of the post-2008 low-rates world order. If 10 years ago US households stood out as some of the most leveraged in the world, today Asia is home to the highest household debt globally.

But some Asian countries, even those with household debt equal to more than 80% of gross domestic product (GDP), are faring better than others. Countries where debt has grown gradually and where regulators implemented pre-emptive macro-prudential policies are more likely to minimise blows to economic growth. Those with reactive regulatory bodies and where household debt surged in just a few years are more at risk, according to analysts and economists. Malaysia and Thailand are at the top of this list.

GDP impact

Domestic credit growth and swelling household debt have kept many Asian economies humming, even in the face of weak external demand from the West after 2008. Asian banks are, to a large extent, capitalised enough to bear the brunt of high household debt. But if other economic sectors start faltering, these obligations could start eroding GDP growth. “Household debt is a growth problem, not a financial system problem,” says Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong.

If debt becomes unsustainable and households deleverage, consumer spending is likely to choke and consumer confidence will wane, leading to a probable sowing of the positive momentum gathered in recent years – a perfect recipe to squeeze economic growth.

Asian property markets – which have been fuelled by household debt since 2008 – could be the first to burst. In November 2015, housing transaction volumes in Hong Kong – the world’s least affordable housing market, according to Demographia’s International Housing Affordability Study – were the lowest on record, says Mr Neumann. “Prices have not dropped because people are not forced to sell yet. But what if interest rates increase more than expected? What if we get another taper tantrum? Hong Kong property prices will just drop,” he adds.

Now that slumping commodity prices and weakening Chinese demand are softening export markets, Asian countries would not be able to fall back on the external sector if their domestic economies underperform.

Malaysia and Thailand debt soars  

Malaysia and Thailand stand out as two Asian countries where household debt has accelerated the most since 2008. Household debt-to-GDP ratios in both countries almost doubled between 2008 and 2014 to nearly 90%. Thailand’s tax breaks on vehicle and housing purchases and Malaysia’s favourable credit conditions and strong consumer demand are widely blamed for accelerating this increase.

These levels resemble household debt in the US on the eve of the subprime crisis, when it peaked at 100% of GDP in 2006 and 2007. The main difference, however, is that Malaysia’s and Thailand’s nominal GDP in 2014 was about one-fortieth of the US's in 2006.

Nevertheless, household debt to personal disposable income in Malaysia, Thailand, Singapore, South Korea and Taiwan is either higher than or as high as it was in the US in 2007, according to Deloitte.

Lending to households is slowing in Malaysia and Thailand thanks to regulatory reforms targeting personal unsecured loans and low-income households. But the fact that household debt-to-income ratios remain high in spite of these reforms is telling. Malaysian and Thai regulators were reactive at best and too late at worst, according to analysts.

High debt in developed Asia

More developed Asian economies are also grappling with high household debt. Data in 2014 ranged from 65% (in Hong Kong) to 83% (in Taiwan) of GDP. But unlike Malaysia and Thailand, this debt has grown gradually and regulators implemented household debt policies very early on.

South Korea is a clear example of this. “Household debt in Korea has been high for some time now,” says Marie Diron, senior vice-president for credit policy at Moody’s. “What would make it unsustainable now? Interest rates are low, unemployment is low and debt affordability is high. I don’t think banks will face repayment difficulties.”

Even before the global financial crisis of 2008, South Korean regulators pioneered the use of loan-to-value ratios, debt-to-income ratios, and geographic lending restrictions: real estate in areas with soaring property prices required higher down payments. Hong Kong also introduced loan-to-value ratios and, together with Singapore, raised stamp duty to cool property prices.

In Taiwan, where Taipei domestic property prices grew to about 15 times income in 2014, the central bank capped the loan-to-value ratio on new housing loans taken out by borrowers with two or more outstanding mortgages at 50%.

Across the Taiwan Strait, mainland China’s household debt has also accelerated – it has doubled since 2008 – but still only accounts for 36% of GDP (as of 2014). Ballooning local government and corporate debt are more pressing matters for Chinese regulators.

Strong banks

Surging household debt has not set off a crisis as most Asian economies can fall back on sturdy banking sectors, according to market participants. Since the 1997 financial crisis, Asian banks have been less reliant on foreign capital and are ahead of the game in terms of Tier 1 capital and profits. More than half of world banking profits are now generated in Asia, and Chinese banks have the highest Tier 1 capital in the world, according to The Banker Database.

Fitch Ratings joins economists in saying that even in Malaysia and Thailand, where household debt has grown the quickest, commercial banks have healthy customer bases, strong capital ratios and asset quality buffers to sustain these liabilities.

But there are still risks. Household leverage is likely to remain high in the short to medium term as consumer loan demand is set to be below GDP growth in both economies, according to Fitch. This has already increased delinquencies among Thai banks.

Asian lenders are also having to manage greater risks. Western banks began lending aggressively to top-quality Asian corporates after 2008 to escape dormant European and US economies, with the result that local banks were forced to move down the credit curve and focus on riskier small and medium-sized enterprises and households instead.

Banks in developed Asia are also vulnerable. In South Korea, household debt is largely short term and carrying floating rates, exposing borrowers to rising interest rate risk. Now, regulators are encouraging banks to move clients to long-term, fixed-rate mortgages and to bundle mortgages and sell them to the Korea Housing Finance Corporation. “Authorities are realising this [short-term debt] might be a risk,” says Alastair Wilson, head of sovereign risk at Moody’s Investors Service.

This article first appeared in the Financial Times service EM Squared.

 

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