We have previously argued that the risks of a debt-fueled systemic financial crisis in Asia ex-Japan appear low in the near-term. That view still holds. While there are pockets of risks that need to be monitored, no one economy appears sufficiently vulnerable at this point to raise a red flag.
In this Research Briefing, we examine the long-term macroeconomic implications of the region’s prolonged credit binge. We conclude that while debt, by itself, is likely to be a drag on Asia ex-Japan’s growth, there are important buffers (high domestic savings, resilient supply-side factors) that should help mitigate the impact.
In the end, we expect Asia’s growth to remain reasonably strong in the long run, despite elevated debt levels.
We forecast debt-to-GDP ratios to remain above 100% for most economies over the coming decade (the only exceptions being India, the Philippines and Indonesia)
Debt-to-GDP ratios are above 100%, but plateauing
To begin with, the latest data from the Bank for International Settlements (BIS) suggest that the non-financial private sector debt-to-GDP ratio has plateaued across most of the region. As of Q2 2017, only Hong Kong and Singapore, which are financial centers, were still seeing a rise in their debt-to-GDP ratios (see chart below).
Asia ex-Japan: Credit and GDP per capita
Sources: Oxford Economics, Bank for International Settlements, Haver Analytics
That said, our estimates (in contrast to those of the BIS) indicate that China’s overall debt-to-GDP ratio was also rising and is likely to increase further this year.
Looking at the breakdown of the BIS data, the headline broadly mirrors the trend in both corporate and household debt ratios. But there are some noteworthy anomalies.
Of particular note is the continued rise in Korea’s household debt-to-GDP ratio (see chart below). China’s household debt ratio also continues to increase at a fast pace, climbing to 46.8% of GDP. Nonetheless, China’s ratio remained lower than most of the other economies in the region (with only India and Indonesia having lower household debt-to-GDP ratios) and the average G20 household debt-to-GDP ratio (60.2%).
Asia ex-Japan: Household debt
So, most of Asia is not adding debt (as a share of GDP) anymore. But it doesn’t seem to be shedding debt either – if it is, it’s not very noticeable. At an aggregate level, only Malaysia and India are deleveraging, but at a very mild pace (according to the BIS).
This is in line with our own private debt-to-GDP ratio estimates for the region. Indeed, we do not look for substantial deleveraging in Asia ex-Japan. We forecast debt-to-GDP ratios to remain above 100% for most economies over the coming decade (the only exceptions being India, the Philippines and Indonesia).
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