Asian household debt soars
The soaring level of Asian household debt is an extremely severe consequence of the widespread low interest rates in the world after 2008. If 10 years ago the leverage of American households was clearly among the highest in the world, then the world’s most indebted households today are Asia.
However, in Asia, some countries are in a much better situation than others-even if some of the former countries have household debt equivalent to more than 80% of their gross domestic product (GDP).
Those countries where debt is gradually accumulated and regulators have implemented preventive macroprudential policies are more likely to minimize the impact on economic growth.
Analysts and economists believe that the risk is higher for countries where regulators are reactive and whose household debt has surged in just a few years. Risks in Malaysia and Thailand top the list.
Domestic credit growth and rapidly expanding household debt have kept many Asian economies prosperous, even after weak external demand from the West after 2008. To a large extent, the Asian banking industry is also relatively well-capitalized and can afford the heavy burden of high household debt. However, if problems occur in other economic sectors, these debts may begin to erode GDP growth.
"The issue of household debt is related to growth, not to the financial system," said Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong.
If debt becomes unsustainable and households start to deleverage, consumer spending will be suppressed, consumer confidence will shrink, and positive momentum will slow down—a situation that usually squeezes economic growth.
The first to burst may be the Asian real estate market bubble. Since 2008, household debt has been driving the rapid expansion of the Asian real estate market. In November 2015, in Hong Kong, the world's most unaffordable housing market, housing transactions fell to historical lows.
“Because people have not been forced to sell, prices have not yet fallen. But what if the rate hike is more than expected? What if there is a taper tantrum again? Hong Kong real estate prices can only fall,” Fan Limin Weighed.
As the decline in commodity prices and weak Chinese demand are weakening export markets, Asian countries will not be able to rely on the export sector if their domestic economies perform poorly.
From 2008 to 2014, the ratio of household debt to GDP in Malaysia and Thailand almost doubled, reaching a level of nearly 90%. Thailand’s preferential tax policies for car and housing purchases, as well as Malaysia’s favorable credit conditions and strong consumer demand, have accelerated the growth of household debt.
Worryingly, the current household debt-to-GDP ratio in these two countries is similar to that of the United States on the eve of the subprime mortgage crisis (the US household debt-to-GDP ratio reached a peak of 100% in 2006 and 2007). The main difference is that the nominal GDP of Malaysia and Thailand in 2014 was approximately one-fortieth of the nominal GDP of the United States in 2006.
However, Deloitte said that the ratio of household debt to personal disposable income in Malaysia, Thailand, Singapore, South Korea and Taiwan is not lower than the 2007 level in the United States.
Due to the reform of the regulatory policies for personal unsecured loans and low-income households, the growth rate of household loans in Malaysia and Thailand is slowing. However, despite the implementation of these reforms, the ratio of household loans to income remains high, which explains the problem. The regulatory agencies in Malaysia and Thailand can at best be regarded as passively responding, and it can even be said that they responded too late.
Some advanced economies in Asia are also struggling to cope with the problem of high household debt. Data from 2014 show that the ratio of household debt to GDP in most advanced economies in Asia is between 65% (Hong Kong) and 83% (Taiwan). But unlike Malaysia and Thailand, the debts of these countries are gradually accumulating, and the regulatory agencies have issued policies against household debts very early.
South Korea is an obvious example.
“South Korea’s household debt levels have been high for some time,” said Marie Diron, Moody’s senior vice president of credit policy. “What makes it unsustainable right now? Interest rates are higher. Low, low unemployment, high debt affordability. I don’t think the banking industry will face repayment problems."
As early as 2008, Korean regulators took the lead in introducing loan-to-value ratio, debt-to-income ratio, and regional loan restrictions (in the event of soaring real estate prices). Regions require a higher down payment ratio). Hong Kong has also introduced loan-to-value ratios, and Hong Kong and Singapore have also increased stamp duty to cool down real estate.
The views of Fitch Ratings are consistent with those of economists. They believe that even in Malaysia and Thailand, where household debt levels are growing the fastest, commercial banks have a healthy customer base, a strong capital adequacy ratio, and a good The quality of assets serves as a buffer, sufficient to maintain these liabilities.
However, there are still risks right now. Fitch believes that as consumer loan demand in Malaysia and Thailand is expected to be higher than GDP growth, household leverage may remain high in the short to medium term. In Thai banks, this situation has begun to lead to an increase in defaults.
The Asian banking industry still has greater risks to manage. After 2008, the Western banking industry began to lend to top Asian companies to escape the sluggish European and American economies. As a result, local Asian banks were forced to adjust downwards and instead mainly lend to high-risk small and medium-sized enterprises and households.
There are also weaknesses in the banking industry in developed Asian countries. In South Korea, most household debts are short-term debts with floating interest rates, which exposes borrowers to the risk of rising interest rates. Now, regulators are encouraging banks to switch customers to long-term mortgages with a fixed interest rate and package the mortgages for sale to the Korea Housing Finance Corporation (Korea Housing Finance Corporation).
"The authorities are beginning to realize that this (short-term debt) may be risky," said Alastair Wilson, head of sovereign risk at Moody's Investors Service.