Asia’s debt level to climb further after ECB’s latest monetary easing

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SINGAPORE — With global liquidity likely to remain high following the monetary easing by European Central Bank (ECB) last week, most Asian economies will see more credit-fuelled growth which may lead to higher debt level, said latest analysis.

For the first time, ECB pushed deposit rates into negative territory last week.

ECB officials also threw in plenty of other goodies, like extra liquidity.

There are already speculations in the market that the ECB may have to pursue outright quantitative easing like those implemented by the U.S. and Japan in future, given the dismal economic growth in Euro-zone.

While there is fairly little immediate impact on Asian financial markets so far, the prospect of further monetary easing from ECB means liquidity should stay in much abundance, supporting credit-fueled growth among most Asian economies.

Indeed, a closer look at the credit position of Asian economies reveals that Asian debts have climbed further recently, underlining the rising credit intensity of economic activity despite a slowdown in gross domestic product (GDP) growth.

By essentially throwing in any type of debt outstanding, whether issued by the government, firms, or households both external and internal — HSBC Global Research found that total debt as a share of GDP in emerging Asia rose last year to 208 percent from 192 percent in 2012.

Excluding China, it climbed from 172 percent to 180 percent.

While all the attention is on China at present, total debt-to- GDP ratios are also higher in Singapore, Japan, China’s Hong Kong, South Korea, and Malaysia. Since 2008, credit has grown especially rapidly relative to GDP in these economies.

As for India, Indonesia, and the Philippines, the aggregate leverage has barely increased, partly reflecting the fact that government debt fell as a share of GDP while private sector indebtedness rose.

HSBC said that what matters is not just the level of debt but the speed with which it climbs. Household debt ratios have risen particularly quickly in Singapore, China (from low levels), Malaysia, and Thailand.

But HSBC cautioned against reading too much on the high debt-to- GDP ratios of Singapore and Hong Kong as their numbers may exaggerate the debt held by residents due to their status as regional financial centers.

Hong Kong banks, for example, have sharply raised their lending to Chinese firms in recent years, yet it is difficult to strip out exposure to non-residents on a consistent basis.

Still, the rising credit intensity of GDP growth is not desirable and sustainable in the long run.

While the rise in credit is relatively easy to finance for now, given that global interest rates are near record lows, the region will have to wean itself from its addiction to debt at some point in future.

Even if Asian central banks are now in no mood to tighten aggressively, with some such as China’s central bank instead relaxing its grip gently to keep credit conditions accommodative enough to keep the economy ticking along, they have to realize that growth cannot be sustained simply by expanding credit, the HSBC said.