By TOM WRIGHT at The Wall Street Journal
SEOUL—Asian countries borrowed heavily to maintain growth during the financial crisis, but couldn’t break the habit even as the global economy healed. Now they are feeling the hangover.
Growth is slowing fast across the continent as consumers and businesses focus on repaying debt. Central banks have cut rates, pushing currencies lower, but economies haven’t picked up. Demand has stayed weak, keeping wages stagnant and price growth anemic, making borrowings even harder to repay.
This dynamic could significantly harm the region’s economic prospects, potentially dragging down global growth rates.
“The problem is people already have taken on too much debt,” says Paul Sheard, chief global economist for Standard & Poor’s Ratings Services. “Even if you cut interest rates to zero, people are not going to borrow money.”
Kim Hee-do, a 35-year-old office worker in Seoul, is among those who refuse to borrow more, despite three interest-rate cuts by the South Korean central bank in recent months. Mr. Kim’s wife was hoping to take advantage of 1.75% interest rates to replace the couple’s 2003 Volkswagen Beetle, but he talked her out of it.
“I could consider myself successful,” Mr. Kim said. “But I don’t feel I can spend more and I’m worried about my future.”
Half of global debt issued over the past seven years went to emerging- market economies, much of it to Asia. China alone accounted for about one-third of the rise in debt globally since 2007, according to the Mckinsey Global Institute.
Debt levels in several Asian countries, such as China, Malaysia, Thailand and South Korea, are higher than they were before the Asian financial crisis of the late 1990s. Some countries, such as South Korea, Malaysia and Australia, have household-debt-to-income levels greater than the U.S. had before its financial crisis.
Countries in the region had been careful about debt after the pain of the Asian crisis. That allowed them to borrow to maintain growth and serve as a buffer for the rest of the world during the global financial meltdown. But Asia kept borrowing even after the crisis.
“Asia has become addicted to credit and easy money has bred complacency among policy makers,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings PLC.
There is an element of irony in Asia’s debt binge. The U.S. debt boom that led to the financial crisis was made possible in part by low interest rates caused by high savings rates in Asia. Countries in the region, particularly China, gobbled up U.S. Treasury debt, driving down yields and borrowing costs in the broader economy.
Today, super-loose monetary policies in the U.S., Europe and Japan have caused cash to flood into Asia. Yield-hungry investors have driven down interest rates, allowing governments, companies and individuals to borrow more than ever before, at the lowest rates in history.
The borrowing has played out differently across the region. In China, giant state-owned businesses, real-estate developers and local governments loaded up on debt. In Malaysia and Thailand, it was consumers who borrowed to fund the trappings of a middle-class lifestyle, such as cars and home appliances.
Commodities producers across the region took on debt in the belief that surging demand and high prices would create huge payoffs for speculative investments. In Japan, the government continued to live beyond its means, pushing the economy’s already high total debt to 400% of annual economic output, by far the highest level in the world.
Even excluding Japan, debt in Asia rose to 205% of gross domestic product in 2014, compared to 144% in 2007 and 139% in 1996, just before the Asian financial crisis, according to calculations by Morgan Stanley.In China, total debt rose to $28.2 trillion in mid-2014, or 282% of GDP, up from $7.4 trillion in 2007, according to McKinsey. The ratio is 269% in the U.S.
Even excluding Japan, debt in Asia rose to 205% of gross domestic product in 2014, compared to 144% in 2007 and 139% in 1996, just before the Asian financial crisis, according to calculations by Morgan Stanley. In China, total debt rose to $28.2 trillion in mid-2014, or 282% of GDP, up from $7.4 trillion in 2007, according to McKinsey. The ratio is 269% in the U.S.
In some poor countries such as India and Indonesia, debt is still relatively low compared to the size of their economies. But pockets of debt, such as among India’s infrastructure companies, are weighing on the economy. Other places, including South Korea and Thailand, are facing a difficult combination of high debt and ageing populations, meaning their already-slowing economies are unlikely to give the same kind of lift to the world’s growth as in the past.
Despite the rise in debt, few expect a financial crisis in Asia. Most borrowing was done in domestic rather than foreign currencies, so a currency depreciation isn’t likely to boost the chances of default. Too much debt denominated in foreign currencies helped set off the Asian crisis in the 1990s.
Most governments in Asia have modest debt levels, allowing them to bail out borrowers and stimulate their economies. And borrowing is largely of the plain-vanilla variety, mostly bank loans and bonds, rather than the highly leveraged structured products that contributed to the U.S. housing bust.
But there are worrisome trends. In China, half of the debt is tied to real estate and a third of the outstanding borrowing came through the country’s shadow-banking system. That debt could ricochet onto bank balance sheets, as happened during the U.S. financial crisis. China’s stock-market rally has been juiced by margin lending, which is up 70% this year.
The biggest near-term risk is a rise in U.S. interest rates, which could send capital flowing out of the region, hurting stock and bond prices, driving up borrowing costs and causing destabilizing fluctuations in foreign-exchange markets. In Southeast Asia, much of the local-currency lending was done by foreign investors, who are quick to move their cash in times of stress.
South Korea is a microcosm of Asia’s problems. The country’s conglomerates were hit hard by the Asian financial crisis, but since then, South Korea’s households have borrowed heavily.
Mr. Kim and his wife, who recently became parents to a baby girl, agreed to keep their aging Beetle because the couple’s mortgage payments suck up almost a third of his annual 36-million-won ($32,500) after-tax income. Mr. Kim didn’t get a year-end bonus as expected, and scrapped plans for an overseas vacation.
With a debt-to-GDP ratio of 286%, according to McKinsey, South Korea is among the world’s 20 most indebted countries, and its household-debt-to-GDP ratio of 81% puts it just ahead of the U.S.
Despite the debt overhang, South Korea’s economy is expected to grow by more than 3% this year, one of the fastest rates among developed countries, and the central bank still has room to cut interest rates.
Warning signs are piling up, however. Concerns about deflation, a decline in prices that makes consumers reluctant to spend and debt harder to repay, are growing. In March, consumer prices rose at their slowest pace in almost 16 years.
With rate cuts and a depreciating currency failing to boost demand, the government is trying to drive up prices of real estate, which accounts for three-quarters of household assets. It eased limits on bank lending for mortgages and increased price caps for developers.
The result was that household debt grew almost 7% year on year in the fourth quarter, its fastest pace in three years. House prices have begun to rise mildly but retail sales have remained moribund.
Yongbeom Kim, a senior official with the Financial Services Commission, the country’s financial regulator, defends the increase in debt, saying tightening lending would be “like shooting yourself in the foot.”
But Mr. Kim acknowledged the lower rates and higher borrowing won’t boost household spending significantly over the long term. That will take structural changes, like getting South Korea’s cash-rich conglomerates to pay higher wages, he said.