Asia ‘at risk of emerging credit bubble’
Credit has grown “vigorously” in several economies, noted RBS analyst Sanjay Mathur yesterday.
The growth has raised concerns that Asia is becoming overly dependent on credit, while the build-up in household leverage in places such as Singapore could start to curb domestic demand, he noted. Leverage refers to the ratio of debt to personal income.
The bank’s analysis indicates credit has risen, especially in Hong Kong, Singapore and Thailand. The levels by themselves might not seem daunting, but the pace of growth is worrying, said Mathur. A sharp increase in credit over a short period could weigh on asset quality if these economies suffer interest rate or income shocks, he noted.
In Malaysia, Hong Kong and Singapore, for instance, household debt now exceeds 65 per cent of gross domestic product (GDP). Property forms a large share of household assets, so a drop in real estate prices or a rise in mortgage rates could have serious effects.
“Though banking systems are well-capitalised in these countries and we see no immediate problems, the risk is that a rise in interest rates, a slowdown in household income growth or a drop in property prices could restrain consumption growth,” noted Mathur.
Singapore is seen as one of the economies where such a risk could be an issue. Between the first quarter of 2008 and the third quarter of last year, household liabilities here increased from 61 per cent of GDP to 74 per cent. The corresponding increase in household wealth was concentrated almost entirely in property assets, with the share of financial assets remaining stable.
Mathur noted that even though there is no immediate crisis on the cards for the region, vigilance is required.
Credit insurance firm Coface Group noted in a report this week that expansionist monetary policies in emerging economies since the 2008 global financial crisis have generated sustained growth in bank credit, to the point where bubbles are forming.
Failures in prudential controls have also played a part in contributing to these bubbles, it added.
Economies in emerging Asia – Malaysia and Thailand and, to a lesser extent, South Korea, China and Taiwan – are the most at risk, it said. But the emerging economies of Chile, Turkey, Russia and Venezuela are also experiencing a credit boom or are at risk of one, it noted.