Asian Debt and Oil

Is Asia’s rising debt a threat to growth? The Asian Development Bank’s Asian Development Outlook for 2015 poses the question but singularly fails to answer it. That in itself is hardly surprising given the diversity of economies and their debt profiles. Yet it does eventually draw attention to a few countries that clearly need to reverse the course they have been following.

Top of the list is, rather obviously, China where debt to GDP has risen to 235 percent, an especially high figure for a developing country. But in the China case the concern is more that the latest surge is accounted for by the non-government sector – so called private firms and, to a much lesser degree, households. This could be especially worrying for a reason the ADB does not mention: the opaque nature of what constitutes non-government business in China. Much of the debt is probably owed by entities related to firms and financial intermediaries owned by local governments. These may in practice enjoy state protection and their debts will one way or another be absorbed by it. In which case there is no need for crisis – just a further slowdown in the economy as more capital is misallocated.

The ADB also notes a sharp rise in foreign currency debt in the region – though it remains a small proportion of the whole. This is unlikely to be a big problem for China which clearly intends not to follow Europe and Japan into encouraging exchange rate decline. But it must be a concern for corporate in other countries who had taken to borrowing cheap dollars but now see exchange rates raise those costs significantly. Most foreign debt is corporate. Most SE Asian currencies – with the Ringgit and Rupiah in the lead and the Peso excepted – have seen sharp falls. Thailand has seen a smaller decline, which is fortunate given the amount of foreign debt taken on by some expansionist corporate. But it may be early days. The dollar’s shift to strength is the prelude to higher interest rates.

For Malaysia however the debt issues is not a corporate one or even a foreign exchange one. It is government borrowing, which remains at a very high level, helping to push economic growth in the short run but doing little to sustain longer term growth. Malaysia also has a high household debt level which has been boosted by rising house prices, up 40 percent between 2009 and 2013.

Of course low interest rates and rising housing prices are intimately linked, especially in those places obsessed with property ownership and enjoying ready access to debt. Thus Hong Kong and to a lesser degree Singapore stand out as beneficiaries of years of openness to easy post-2008 global money. Debt’s share of GDP zoomed from 204 percent to 307 percent of GDP in four years to 2013, and to 233 percent of GDP in Singapore. Both economies have since seen cooling measures which should avoid future crisis but which will still cause plenty of pain when rates rise.

The same applies to Korea where private sector debt was already high in 2008 and remains so. Like China, Korea strives for higher growth rates than its demographics and its cost levels warrant. Nor, with its own foreign corporate debt, can it probably afford a sharp currency decline to compete with the Yen and Euro. Competition from its neighbors is eroding the benefit of low oil prices.

On the other hand India, which was recovering from an earlier credit boom, saw a small contraction in its debt to GDP during 2009-13. Vietnam was also in recovery mode from its previous credit boom. Debt levels in the Philippines rose modestly as the country continued to enjoy a strong currency and large external surplus.

Another focus of the ADB report is the mostly very positive impact on the region of the decline in oil prices. However this is not well distributed and will tend to benefit most those who also have less immediate concerns than debt levels – India and the Philippines. Malaysia is clearly a loser with gas prices hurting exports and government revenues while Indonesia and to a lesser extent Thailand are suffering from the link between food and energy prices. Indonesia may find it harder to finance its badly needed infrastructure investment and Thailand conservative finance ministry put a go-slow on the much touted mega rail projects.

Overall, Asia still leads the world as India speeds up as China slows and most of the rest of east Asia make steady but modest progress. But debt and oil prices are good guides to relative prospects for the next year or three.