| Global Research | 10:00 GMT 01 July 2013 |
Asia leverage uncovered
Finding the balance: Growth potential vs. solvency stress
The following is a joint research report from the Equity and Regional Research
teams. Two versions of the report are available; the Equity Research version includes
additional company-specific content.
 Unprecedented approach to systemic credit risk: This report explores leverage
and solvency across Asia using an analytic framework unachievable six months
ago. We synthesise a new BIS database with bottom-up corporate credit metrics
and other information into a map of leverage and solvency at the sector
(household, corporate and government) level. We can now combine borrowings,
borrower cash flows, interest rates and repayment tenor into new solvency metrics,
most notably debt service ratios.
 Looking only at Asia’s manageable aggregate leverage misses pockets of
opportunity and risk in individual countries and sectors. China‟s corporate sector –
large, with high leverage and weak cash flow – remains an issue. Low household
leverage in China, India and Indonesia suggests capacity for borrowing,
consumption and rebalancing. Korea‟s high leverage spans the economy and
continues to drag on growth. India‟s stresses are confined to listed corporates, a
relatively narrow slice of total credit. ASEAN flashes isolated warnings – household
leverage in Malaysia and rapid growth in Thailand.
 Challenges and opportunities: In addition to identifying challenges or slower
growth to come, we identify areas of future strength in the region. This report
examines the sectors that are areas of concern, those with moderate risks, and
those with room for further leverage. We conduct this analysis just as Asia exJapan‟s overall credit-to-GDP ratio reaches a similar level to the world average.
David Mann, +65 6596 8649
David.Mann@sc.com
Chidambarathanu Narayanan, +852 3983 8568
Chidambarathanu.Narayanan@sc.com
John Caparusso, +852 3983 8517
John.Caparusso@sc.com
Prabhat Chandra, +852 3983 8705
Prabhat.Chandra@sc.com
SCout is Standard Chartered‟s
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Original ideas on Universal and
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Important disclosures can be found in the Disclosures Appendix
All rights reserved. Standard Chartered Bank 2013
research.standardchartered.com
Asia leverage uncovered
Table of contents
Executive summary
3
Introduction
5
Results: Leverage map
8
Private borrowing: Businesses and households
16
Corporate leverage
21
Household borrowings
30
Public debt
42
Macro-prudential policy measures
47
Australia – How much is too much?
51
China – High corporate leverage, low household leverage
53
Hong Kong – Risks from higher global rates
57
India – Risk profile of debt has increased
60
Indonesia –Room to boost household consumption through leverage 65
01 July 2013
Japan – Living on the edge
69
Malaysia – Less room for manoeuvre
72
Philippines – A structural improvement in leverage conditions
77
Singapore – Leverage is comparatively high but manageable
81
South Korea – Highest private-sector debt in the region
87
Taiwan – Rapid rise in private-sector debt is a concern
89
Thailand – Growing leverage
92
Appendix
94
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Asia leverage uncovered
Executive summary
This study extends beyond the standard „total debt-to-GDP‟ analysis to take a more
granular view of leverage and solvency across corporate, household and government
sectors in Asia. After years of rapid economic growth, Asia excluding Japan‟s (AXJ‟s)
overall debt-to-GDP ratio has just reached the world average. We conclude that
current leverage levels are broadly manageable, with areas of concern and pockets
of opportunity – areas where leverage remains low.
China’s leverage is the most
worrisome in the region; debt is
concentrated in the
corporate sector
China‟s leverage is broadly the most worrisome in the region, as widely understood.
However, the concern arises not from its overall credit-to-GDP ratio of 214%, which
places it only fifth among the Asian countries in our study. Rather, the concern is that
debt is heavily concentrated in the non-financial corporate sector. This is despite the
reclassification of local government investment vehicle (LGIV) debt as government
debt. The pace of credit growth is also worrying. Total credit has grown 22% a year in
the past five years, 6ppt faster than China‟s nominal GDP growth, which is the
highest in the region.
The redeeming feature here is that the government has started to tackle this issue by
slowing growth and curbing lending to industries facing overcapacity. In the event of
a significant deterioration in the economy, problem loans are likely to surface and
some banks may have to be recapitalised. But unlike most other major economies
today, China has sufficient financial means to inject capital and restructure its
problem lenders.
Aside from China‟s corporate sector, South Korea‟s high leverage spans the
economy and continues to drag on growth. But this problem should not be seen as a
tail risk that could threaten financial stability. South Korea has managed to avoid a
hard landing since 2003 and has proactively used macro-prudential measures to limit
overall leverage, particularly its external debt vulnerability.
Household leverage has room for
further growth in China, India
and Indonesia
We also focus on a longer-term positive story that receives little attention but will help
the world to rebalance. Household leverage across most of Asia – particularly in
China, India and Indonesia – remains low and has potential for further growth.
Indonesia‟s credit growth has recently accelerated, but it still has a relatively low level
of aggregate debt to GDP, giving it room to use leverage to boost growth. While
India‟s high government debt is a concern (which the authorities are addressing),
household debt is relatively low. Taiwan‟s total leverage is relatively benign – its
household debt service ratio is low and a legally mandated ceiling on the total
government debt-to-GDP ratio enforces fiscal discipline.
In ASEAN, stresses are confined to household credit in some economies. Malaysia‟s
household leverage is very high, as is Singapore‟s on some metrics. However, both
countries‟ household sectors have accumulated high liquid assets through mandatory
savings. In Thailand, relatively fast recent credit growth has led to a rise in solvency
stress indicators. However, levels of debt and debt service indicators provide comfort
and do not raise immediate concerns. The Philippines, an outperformer in Asia, has
plenty of room to expand its private-sector leverage to boost domestic consumption
and sustain growth. There is also ample scope for the private sector to partner with
the government in financing ambitious infrastructure projects.
01 July 2013
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Asia leverage uncovered
Our study shows that while there are pockets of emerging concern, Asia‟s
fundamentals remain robust. Strong government and household balance sheets
across most of the region provide sufficient flexibility to counter inevitable bumps as
the economic cycle turns. Learning from Asia‟s financial crisis in 1997-98,
governments in the region have used been using macro-prudential policies since
before they were considered to be best practice. We see scope for several Asian
economies to increase borrowing to maximise their growth potential.
01 July 2013
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Asia leverage uncovered
Introduction
Leverage: A double-edged sword
We identify countries and sectors
where leverage is a concern, and
those with room to increase
leverage further
This comprehensive report examines leverage across countries and sectors in Asia.
We identify areas of concern, those with moderate risk that requires monitoring, and
those with low risk and room for further leverage. The concern in China is high
leverage concentrated in the corporate sector. Korea‟s leverage is high, but this
should not trigger system tail risk. Elsewhere, leverage issues are relatively narrow
and manageable – potential drivers of higher bank provisions, but not systemically
destabilising.
This report uses new indicators not just to highlight risks, but also to identify areas of
future strength in the region. The household sectors in China, India and Indonesia all
have room to use leverage to achieve faster and more resilient growth given their
currently low levels of leverage. Our analysis is timed just as AXJ‟s overall credit-toGDP ratio reaches a similar level to the world average (Figure 1).
The ability to use more household
debt to fuel growth in China,
India and Indonesia is a key
long-term positive
We expect global growth in the coming years to be supported by strength in
emerging markets, as we highlighted in our 2010 Super-Cycle Report. Asia‟s growing
productivity, urbanisation, rising incomes and rising middle class are all integral to the
story. The growing use of household debt is an important part of this story, and will
help to rebalance the global economy. In this report, we use new data to identify
areas of risk and potential strength and monitor their development. Our analysis
draws on a newly upgraded dataset from the BIS, as well as our own aggregated
data for income, debt and debt servicing metrics.
Asia has been using macroprudential policies effectively for
some time
The broad acceptance that macro-prudential policy measures can be „best practice‟
makes the region less vulnerable to future crises, in our view. The pre-GFC
„Washington Consensus‟ for a laissez-faire approach, even in the face of market
failures, has been proven wrong. In its place are more proactive policies around the
region. These policies, alongside a greater focus on early warning indicators from
institutions such as the IMF, give us confidence that future problems will be dealt with
more quickly – and at less economic cost – than was the case in the past
few decades.
Figure 1: Total private debt-to-GDP ratio: AXJ catches up with the world
average, while the G7 continues to deleverage (%)
180%
160%
G7
World
140%
AXJ
120%
100%
80%
60%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Sources: BIS, IMF, Standard Chartered Research
01 July 2013
5
Asia leverage uncovered
In this summary we outline our reasons for tracking leverage so closely, the
framework for our analysis, the datasets we have constructed, and our key findings.
We provide more detail on each of these areas, plus country-specific sections for key
Asian economies, in later sections of the report. The most useful of these new
indicators are debt service ratios (DSRs) that combine borrowings outstanding,
borrower cash flows, interest rate and repayment tenor to more fully gauge
borrowers‟ ability to withstand their debt burdens.
Leverage problems are at the heart of crises . . .
At the centre of the story
Leverage is core to all crisis stories
We acknowledge the variety of financial crises and the interplay of many contributing
factors – currency collapse, sovereign default, property bubble and banking system
insolvency, among others. Virtually all financial crises ultimately trace back to leverage
– either unsustainably high leverage levels, or excessive growth in debt and the
attendant problems of asset bubbles and resource misallocation, which eventually
trigger a cycle of default, liquidation and asset price deflation. The last few years have
shown that any country, no matter its stage of development, is vulnerable to crisis. No
longer are crises considered to be a problem for emerging markets alone.
. . . but leverage can be good
Enables resilient growth, particularly when it is for investment
Debt enables the inter-temporal
exchange of GDP
Debt is an essential enabler. It can be considered equivalent to GDP borrowed from
the future. For most consumers, debt enables them to purchase a home long before
they have earned enough money to pay for it. Debt also allows consumers to smooth
out their consumption during shocks. Corporates need debt to create capacity to
grow. Without debt, opportunities would be missed that could be taken by those with
access to credit.
For governments, which traditionally act as economic shock absorbers during
downturns, debt is usually built up when automatic stabilisers kick in (such as
increased unemployment claims or stimulus spending measures) and reduced during
periods of stronger growth. Counter-cyclical fiscal policy lessens the blow during
downturns, financed by surpluses built up in upturns. In extreme cases, governments
have to take private-sector debt onto their own balance sheets to avoid systemic
collapse. Monitoring total leverage to GDP in an economy is therefore vital to
understanding potential exposures. We explore total leverage in the government,
corporate and household sectors across Asian economies. We also touch on the
issue of external leverage, which overlaps with these other sectors.
Framework
Gauging where leverage is excessive and where there is room for more
The idea that rapid credit growth can trigger credit distress – in some cases even in
countries that do not have particularly high absolute levels of leverage – has a
reasonably strong intellectual pedigree. An IMF paper1 reviewing 99 credit examples
globally since 1960 concluded that 70% of “credit booms” in emerging Asian
economies ended “abruptly”, i.e., in crises. Other IMF work has found that a rise in
the ratio of private-sector credit to GDP is a significant predictor of future financial
system distress.2 In addition, credit growth is an independent variable in the credit
1
2
Selim Elekdag and Yiqun Wu, „Rapid credit growth: Boon or boom-bust?‟, IMF Working Paper WP/11/241 (October 2011)
Reinout de Bock and Alexander Demyanets, „Bank asset quality in emerging markets: Determinants and spillovers,‟ IMF Working Paper WP/12/71 (March 2012)
01 July 2013
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Asia leverage uncovered
risk stress-test models employed by several national central banks, notably the Bank
of Canada and the Deutsche Bundesbank.
Threshold of what constitutes a
‘boom’ is difficult to pin down
But what are the best ways to identify the credit booms that typically precede
financial system stress? Empirical work has established several closely related
metrics and thresholds. Studies that focus on sharp rises in leverage set the
threshold as a change in private non-financial credit-to-GDP of more than 1.5σ above
a country‟s 10-year trend increase, sometimes with the proviso that the ratio rises by
at least 10ppt in a year. Others focus on growth in the stock of credit, with a threshold
set at real growth of more than 1.5σ above de-trended mean growth, particularly if
this heightened credit growth persists for two or more years. Some provide a simpler
threshold: real and nominal credit growth in excess of 15% and 20%, respectively.
They note that Asian credit booms that ended in crisis experienced nominal credit
growth of 20% on average in the period preceding the peak of the boom. For total
credit growth, a popular rule of thumb is that credit growth should not exceed GDP
growth by more than 5ppt3.
Ultimately, a leverage mosaic
is helpful
Ultimately, though, we need not rely on any single metric. In this report, we explore
sector-level and aggregate leverage through a broad range of measures.
Subsequent sections of this report address the solvency dynamics and
measurements of specific sectors in further detail.
The data
We introduce a raft of metrics to help gauge the health of leverage, including
aggregated household and corporate-sector income and borrowing data. This
enables us to provide our own estimates for DSRs around the region. The full list of
metrics we use is summarised in Figure 2.
Figure 2: Overview of leverage and solvency metrics
Sector
Economy
Government
Private nonfinancial
Private
businesses/
“Corporate”
Leverage/solvency metrics
Sources/comments
• Total credit/GDP
• Credit growth minus GDP growth > 5ppt
• Credit growth > 1.5σ above average
• Government debt/GDP
• Nominal interest rate minus GDP growth
• Total borrowings/GDP vs. GDP per capita
• Credit growth minus GDP growth
• Credit growth > 1.5σ above average
• Debt service ratio (DSR) estimated principal plus interest % GDP
Estimated business borrowings/GDP
•
Trend in ΔGDP/Δ credit (marginal efficiency of credit)
•
•
Includes both private businesses and households
Use same metrics as for the total economy; literature on „credit
booms‟ typically focuses on private non-financial borrowers
•
Source: BIS private-sector debt database
Bottom-up credit metrics:
• Debt/equity
• Debt/EBITDA
• Interest cover (EBITDA/interest expense)
• DSR: principal plus interest % EBITDA
•
•
Listed non-financial corporate universe
Focus on medians and quartiles, not aggregates
•
•
•
•
•
•
Household borrowings/GDP
Borrowings/household income
Interest coverage ratio (household income/interest plus principal)
DSR: principal plus interest % household income
Gross cross-border borrowings/GDP
Net external borrowings/GDP
•
•
•
Gross cross-border borrowings/GDP
Net external borrowings/GDP
•
•
•
•
BIS database includes estimates for household aggregate
borrowing
Standard Chartered consumer finance database: Product build-up
of household balance sheets, income and solvency metrics
BIS Int'l Banking Statistics
Analytically tractable for gross borrowings on „locational‟ basis
Estimated external balance sheet for net exposures
Gross non-financial sector external borrowings included in
aggregate leverage estimate
BIS Int'l Banking Statistics
Analytically tractable for gross borrowings on „locational‟ basis
Estimated external balance sheet for net exposures
Gross non-financial sector external borrowings included in
aggregate leverage estimate
Household
External
•
•
•
•
•
Source: Standard Chartered Research
3
World Economic Forum Report: „More credit with fewer crises‟ (2010) http://www3.weforum.org/docs/WEF_NR_More_credit_fewer_crises_2011.pdf
01 July 2013
7
Asia leverage uncovered
Results: Leverage map
The scale and pace of leverage
build-up in China stand out both
regionally and globally
Asian economies and sectors can be divided into three broad leverage categories:
those that are areas of concern (shown in red in the tables below), those with
moderate risks (yellow), and those with low risk and room for further leverage
(green). In all cases it is vital to know the story behind the numbers, particularly
because while some countries still have low absolute leverage levels, debt in some
sectors may have grown unsustainably fast.
Figure 1 shows our projections for total (non-financial) debt/GDP across Asia, with
comparisons to other key global markets. The final column, showing total credit
growth divided by GDP growth, provides a sense of how effective credit growth has
been. An economy with a very high ratio is getting much less „bang for its buck‟ from
credit growth in terms of boosting overall growth. (Economies with particularly low
GDP growth are likely to have elevated ratios using this metric, given the
small denominator.)
Note: Throughout this report, 2012 data on debt is through Q3-2012.
Figure 1: Key economy-wide metrics for credit
Colours indicate leverage and potential stress; red = high, yellow = moderate/sustainable, green = low
GDP,
USD bn*
Debt/GDP
5-yr debt growth
(CAGR)
2015 debt/GDP,
our forecast
5-yr credit
growth less GDP
growth (bps)
5-yr credit
growth/GDP
growth
Australia
1,537
208%
7%
219%
140
123%
China
8,017
214%
21%
269%
609
140%
258
268%
9%
270%
424
192%
1,784
138%
15%
146%
(38)
98%
842
58%
15%
63%
(141)
91%
Japan
6,068
400%
2%
389%
321
-112%
Korea
1,141
232%
9%
255%
324
155%
302
181%
12%
204%
467
160%
247
81%
9%
79%
(26)
97%
Singapore
278
255%
10%
268%
424
172%
Taiwan
486
149%
4%
140%
149
165%
Thailand
352
166%
10%
171%
446
181%
France
2,599
254%
6%
281%
445
379%
Germany
3,386
202%
3%
206%
154
185%
Italy
2,020
253%
3%
270%
305
891%
Spain
1,399
287%
4%
320%
285
381%
United Kingdom
2,483
293%
6%
308%
353
278%
United States
15,811
264%
5%
264%
232
202%
Sep-12
Hong Kong SAR
India
Indonesia
Malaysia
Philippines
#
Note: We have based the thresholds for ‘high’, ‘moderate’ and ‘low’ on findings from Cecchetti et al., ‘The Real Effects of Debt’, BIS (September
2011); this report gives estimates of thresholds beyond which GDP growth slows.
*In equivalent nominal USD terms using Sep-2012 FX rates
#
We use 3-year averages due to limited data availability
Sources: BIS, IMF, Standard Chartered Research
01 July 2013
8
Colours indicate leverage and potential stress; red = high, yellow = moderate/sustainable, green = low
Total credit/GDP
Credit-GDP growth gap (bps)2
Economy
3
(Credit growth -µ)/10-yr σ
Total borrowings/GDP

Private nonfinancial
sector
Australia
China
Hong Kong
SAR*
India
Indonesia
Japan
Korea
208%
214%
268%
137%
58%
400%
232%
181%
81%
140
609
424
1
-141
321
324
467
-26
149%
166%
424
149
446
-0.1
-0.7
-0.7
1.1
1.2
-1.1
-0.1
-0.2
1.0
-0.1
1.8
136%
187%
73%
34%
161%
198%
124%
38%
143%
109%
120%
115
331
-427
364
1082
-210
257
452
343
512
-28
1191
Credit growth less LT average (ppt) 3,5
-0.2
-0.3
-8.9
-4.8
10.2
-0.7
-3.5
3.7
3.6
3.4
-3.1
6.9
Debt service ratio
17%
16%
19%
12%
6%
15%
24%
14%
4%
14%
10%
16%
Business borrowings/GDP
71%
117%
127%
55%
17%
95%
113%
45%
33%
68%
61%
53%
Debt/equity
47%
26%
50%
28%
45%
25%
29%
42%
Debt/EBITDA1
3.4x
2.5x
2.2x
1.6x
2.8x
1.5x
1.9x
2.1x
33%
14%
55%
21%
34%
17%
11%
33%
73%
76%
75%
31%
79%
48%
64%
65%
20%
60%
18%
17%
85%
79%
75%
48%
68%
50%
83%
34%
26%
135%
177%
147%
65%
91%
14%
11%
21%
42%
47%
45%
16%
2%
2%
4%
4%
7%
7%
2%
Interest burden ratio
1
Household borrowing/GDP
109%
Borrowing/household income
- Household
Borrowing/financial assets
sector
Interest burden ratio
Government
255%
-0.8
Debt service ratio1

Thailand
180%
1
4
Taiwan
Credit-GDP growth gap (bps) 3,5
6
- Private
corporate
sector
Malaysia Philippines Singapore
66%
6%
53%
7%
Debt service ratio
14%
5%
8%
5%
4%
3%
15%
18%
2%
13%
7%
12%
Government debt/GDP
27%
78%
32%
64%
25%
239%
35%
56%7
43%
113%
40%
45%
2.2%
1.9%
0.6%
6.3%
3.1%
6.4%
4.7%
0.8%
11.6%
2.5%
2.2%
4.1%
8%
6%
20%
6%
196%
25%
3%
32%
17%
12%
Int. payments/Govt. revenue
Debt service ratio^
^
We have based the thresholds for marking these ratios as ‘high’, ‘moderate’ and ‘low’ using findings from Cecchetti et al, the Real effects of debt, BIS September 2011 which gives estimates
of thresholds beyond which there is a slowing of GDP growth
* In this table, and throughout this report, the private-sector debt estimates for Hong Kong used to calculated leverage relative to GDP are based on loans for use in Hong Kong; but
aggregate credit growth is calculated on the basis of total loans booked in Hong Kong. For the economy as a whole, we estimate based on total loans booked in Hong Kong.
^Repayment schedule obtained using DDIS function on Bloomberg. Includes T-bills and other short-term instruments; does not include central bank debt and other quasi-public debt.
1
For listed corporates (excluding financial institutions), debt/equity, debt/EBITDA and DSR are calculated for publicly listed non-financial corporations. Interest burden ratio is defined as
interest expense/EBIT for the listed universe.
2
Difference between annualised 5-year average credit growth and GDP growth.
3
Annual credit and GDP growth for the latest period.
4
Debt numbers are in gross terms.
5
Credit-GDP growth gap and credit growth vs. LT avg are calculated based on real GDP and real private-sector credit.
6
Debt service ratio is calculated with GDP as the denominator.
7
Malaysian government debt as per IMF estimates. The government’s official government debt estimate is 52% of GDP.
Sources: Bloomberg, BIS, IMF, Standard Chartered Research estimates
Asia leverage uncovered
01 July 2013
Figure 2: Leverage and credit growth: Summary across countries, sectors and individual metrics (%, except where otherwise noted)
9
Asia leverage uncovered
Figure 2 paints a telling picture of areas of leverage-related concern in Asia, based
on our analysis of existing and new data. China and Korea stand out for having the
most „red ink‟. They are both relatively high on the total credit-to-GDP measure; their
private-sector (non-financial) DSRs are also flashing warning signals. Thailand and
Hong Kong stand out for their high DSRs. India‟s corporate and government sectors
also flash red, while its private-sector DSR is benign due to the low level of
household leverage.
Figure 3 shows the significant rise in AXJ‟s ratio of private-sector debt to GDP over
the past 20 years. AXJ is now on par with the world average, while the G7 continues
to deleverage. As recently as 2008, the debt-to-GDP gap between G7 and AXJ was
55ppt. As of end-2012, it had narrowed to 16ppt. Figure 4 provides a visualisation of
which sectors drove the increase in leverage on an Asia-wide basis.
In the sections below, we place Asian economies into the three risk categories
identified above. In subsequent sections, we carry out this analysis at the sector level.
Figure 3: Total private debt-to-GDP ratio: AXJ catches up with the world
average, while the G7 continues to deleverage (%)
180%
160%
G7
World
140%
AXJ
120%
100%
80%
60%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Sources: BIS, IMF, Standard Chartered Research
Figure 4: Evolution of leverage in Asia (ex-Japan and China)
Weighted average debt/GDP, %
80%
70%
Corporate
60%
Government
50%
Households
40%
30%
20%
10%
0%
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Sources: BIS, IMF, Standard Chartered Research
*For more on this see IMF, Modernizing the Framework for Fiscal Policy and Public Debt Sustainability Analysis, prepared by the IMF Fiscal Affairs Department 2011
01 July 2013
10
Asia leverage uncovered
Areas of concern: China, Korea and Japan
China stands out as having the
fastest credit growth
China stands out most prominently for its increase in leverage (see Figure 5). Total
China’s credit growth has exceeded
its GDP growth by more than 5ppt
in the past five years
China is now nearly on par with Korea in terms of total debt to GDP, well before it
has reached a similar level of GDP per capita. A rapid build-up of debt is usually
associated with future non-performing loans (NPLs). We have been exploring the
likely extent of, and possible solutions to, China‟s LGIV debt problem for some time
(see ‘China – Solving the local government debt problem’, 18 July 2011). Based on
our estimates, China‟s corporate-sector debt metrics flash red across the board
(see Figure 2).
Korea is still working through a
legacy of debt accumulation
Korea has highly indebted household and corporate sectors. The DSR of 24% for
the private non-financial sector is particularly high (Figure 2). The rapid build-up of
debt in the aftermath of the Asian crisis helped to boost GDP growth to an average
of 7.7% (in real terms) between 1999 and 2002, but left a legacy of debt that is still
being dealt with. Korea has managed to avoid a hard landing since 2003 and has
proactively used macro-prudential policies to limit overall leverage, particularly
external debt vulnerability. We are watching closely to see what the policies of
Park‟s government will mean for public debt dynamics, given the preference for
boosting social welfare programmes and less of a focus on growth than
previous administrations.
debt rose to 214% of GDP in Q3-2012 from 162% in 2007. On this measure, China
has seen the fastest rise in leverage in the past five years of the countries in our
study. Figure 5 shows that China‟s nominal credit growth has been well in excess of
its nominal GDP growth over the past five years, a standout in the region. When
countries such as Spain, France, the UK and Italy are added to the comparison,
China is in the middle of the pack (see Figure 6) in terms of the level of total debt
to GDP.
Figure 5: China has the fastest credit growth vs. GDP growth in the region
5-year credit growth CAGR minus 5-year GDP growth CAGR, bps
>450
200 - 450
0 - 200
<0
N.A.
Sources: BIS, IMF, Standard Chartered Research
01 July 2013
11
Asia leverage uncovered
Figure 6: Total leverage – The Philippines and Indonesia have the most room
for more leverage (Debt/GDP, %)
400%
Dec-05
400%
350%
293% 287%
300%
Dec-07
268% 264%
255% 254% 253%
250%
Sep-12
232%
214% 208%
202%
200%
181%
166%
150%
149% 138%
81%
100%
58%
50%
Indonesia
Philippines
India
Taiwan
Thailand
Malaysia
Germany
Australia
China
Korea
Italy
France
Singapore
United States
Hong Kong SAR
Spain
United Kingdom
Japan
0%
Sources: BIS, IMF, Standard Chartered Research
Figure 7: Leverage – How does it stack up?
Debt/GDP, %
Households
450%
Corporate
Govt.
400%
350%
300%
250%
200%
150%
100%
50%
Indonesia
Philippines
India
Taiwan
Thailand
Malaysia
Germany
Australia
China
Korea
Singapore
Italy
France
United States
Hong Kong SAR
Spain
United Kingdom
Japan
0%
as of Q3-2012
Sources: BIS, IMF, Standard Chartered Research
Figure 8: Where does the debt lie?
Breakdown of total debt by sector – households, corporates, government
Households
100%
Private corporates
Government
90%
80%
70%
60%
50%
40%
30%
20%
10%
Philippines
China
India
Japan
Hong Kong
SAR
Indonesia
Singapore
Taiwan
Korea
Thailand
Malaysia
Australia
0%
Sources: BIS, IMF, Standard Chartered Research
01 July 2013
12
Asia leverage uncovered
Japan stands out in terms of its total debt-to-GDP ratio (Figure 6), which at 400% of
GDP is far higher than any other country‟s. Recent dynamics do not yet suggest that
problems are building in the system. The question is whether the stakes have been
raised since the implementation of Abenomics, which may leave Japan more
vulnerable to future leverage-related problems. Even a small rise in JGB yields could
lead to an unsustainable debt path for Japan. We note that business borrowings are
also high.
Figure 9: Leverage – higher and to the right means more vulnerable
Change in debt/GDP since 2005 (y-axis) vs. latest debt/GDP ratio (x-axis)
A large part of Hong Kong’s
leverage growth can be linked to
mainland China
change in Debt/GDP since 2005
90%
ES
HK
70%
FR
CN
50%
MY AU
30%
TW
UK
KR
JP
IT
US
SG
TH
10%
DE
IN
-10%
ID
-30%
0%
50%
100%
150%
200%
250%
Debt/GDP - Q3 2012
300%
350%
400%
450%
Sources: BIS, IMF, Standard Chartered Research
Figure 10: Credit growth – Thailand’s has accelerated, as has Indonesia’s
y/y, number of standard deviations away from 10-year average
Thailand has seen the fastest
acceleration in credit growth,
followed by Japan and Indonesia
>1.5
1.2 - 1.5
1 - 1.2
0-1
-1 - 0
<-1
N.A.
Sources: BIS, IMF, Standard Chartered Research
01 July 2013
13
Asia leverage uncovered
Moderate risk: India, Malaysia, Singapore, Hong Kong
India stands out in Figure 11, which plots 2012 credit growth against 2012 GDP
growth compared to the five-year average for the countries in our study. India‟s credit
growth was similar to the five-year average, but its GDP growth rate was lower. We
will watch this proxy for the quality of credit growth carefully. While India‟s high level
of government debt has long been an issue, it has headed lower in recent years.
However, corporate debt is now becoming a concern, particularly since it has been
sourced increasingly from abroad.
Figure 11 shows the recent performance of credit growth versus GDP growth. The
45-degree line marks the threshold of credit growth that exceeds GDP growth by
more than 5ppt. Again, China stands out using this metric.
For Malaysia, the household sector
is the Achilles’ heel for leverage
Malaysia has seen a relatively steep rise in household debt in recent years, leaving it
with a high household DSR. This warrants attention, as Malaysia already rivals Korea
and the US in terms of household debt to GDP. Countering this concern to some
degree is the fact that Malaysia (like Singapore) has financial assets built up as part
of individuals‟ mandated public pension fund accounts.
Singapore and Hong Kong have both seen large rises in leverage in the past few
years. The relatively small and open nature of both economies increases the amount
of corporate debt that is taken on to enable business in other jurisdictions. This is
particularly true for Hong Kong given its strong links to mainland China. Australia‟s
household debt is also relatively high, having risen strongly since the turn of the
century. While recent household credit growth has been slow and savings rates have
picked up, we see a risk that households may leverage further as borrowing rates
approach lows.
Figure 11: Credit growth vs. GDP growth – Then and now
Credit growth, y/y and GDP growth y/y; countries with a gap of more than 5ppt are
above the diagonal line
25
CN
20
CN
Credit growth, y/y
ID
IN
15
TH
MY
MY
SG
10
UK
KR
UK
5
TH
HK
ID
IN
SG
KR
5 y average
Q3-2012
US
US
HK
JP
JP
0
-2
0
2
4
6
8
10
GDP growth, y/y
12
14
16
18
Sources: BIS, IMF, Standard Chartered Research
01 July 2013
14
Asia leverage uncovered
Low risk and room for more leverage: Indonesia, Philippines,
Thailand, Taiwan
Indonesia has the lowest debt-to-GDP ratio of the countries in our study. This means
there is plenty of room over the longer term to use leverage to enable the economy to
withstand shocks and to grow faster. However, we are concerned about growth in
both external and private-sector debt in recent years. GDP growth has slowed
despite faster credit growth. This indicates that credit growth is not feeding into GDP
growth as efficiently as in the past.
Household credit in Indonesia and
the Philippines is on a secular
rising trend
The Philippines has plenty of room to expand its private-sector leverage further. This
would increase its ability to withstand shocks and boost growth. The low level of
leverage in the economy means there is room to finance the government‟s ambitious
Public-Private Partnership infrastructure investment plans. Increased household
leverage would also help to sustain the recent strength in consumer demand, a
significant contributor to GDP growth.
Taiwan has a relatively benign
overall level of credit to GDP and a
low household DSR
Taiwan‟s total leverage still appears reasonable in terms of both its level and growth
rate. A legally mandated ceiling for its ratio of total government debt to GDP forces
discipline on the government‟s fiscal policy. Taiwan‟s private-sector debt service ratio
is among the lowest in the region.
Thailand’s credit growth has
been high, supported by
government measures
Thailand only just makes it into this category given that its household debt growth
has been particularly strong lately and its private-sector DSR is high. Thailand‟s
credit growth has accelerated well beyond its longer-term average rate, as Figure 11
shows. Recent rapid leverage growth needs to be watched closely. Bank credit
growth remained weak for many years after the Asian crisis, but the recent propertymarket recovery has driven faster growth. Government stimulus measures (such as
tax credits for car and home purchases) have also spurred credit growth. The
government has also extended soft loans to help households and SMEs affected by
the floods of late 2011.
Figure 12: Breakdown of leverage by sector, 2006 versus 2012
Debt/GDP, %
400%
Households - 2006
Private corporates - 2006
Government - 2006
Households - 2012
Private corporates - 2012
Government - 2012
300%
200%
100%
Japan
Hong Kong
SAR
Singapore
Korea
China
Australia
Malaysia
Thailand
Taiwan
India
Philippines*
2012
2006
2012
2006
2012
2006
2012
2006
2012
2006
2012
2006
2012
2006
2012
2006
2012
2006
2012
2006
2012
2006
2012
2006
0%
Indonesia
*Household and corporate debt data is not available for 2006; Sources: BIS, IMF, Standard Chartered Research
01 July 2013
15
Asia leverage uncovered
Private borrowing: Businesses and households
Summary
High-level credit metrics – readily
available, widely tested
This section addresses domestic private non-financial sector borrowings, a category
that includes domestic borrowings by both businesses and households. We focus on
total domestic private-sector borrowing relative to GDP and growth in private-sector
borrowing. Economists at the key multilateral institutions have addressed these
metrics in some detail, and have developed some broad warning signals for
excessive private-sector credit growth. The following sections proceed from this very
general discussion into more detailed explorations of household and
business-sector debt.
Across the private sector, Korea, Hong Kong, China and Singapore currently have
the highest levels of leverage in our sample. At the other extreme, very low
private-sector leverage in India and Indonesia suggests scope for increased credit.
Recent credit growth is most
worrisome in ASEAN
On credit growth metrics (credit-GDP growth gap and current credit growth versus
the long-term average), Thailand and Malaysia stand out because of their recent
rapid growth. While Indonesia‟s credit growth is also high, the very low absolute level
of leverage allays our concerns. Korea, with its very high debt levels, is not in a
position to grow credit rapidly. In Hong Kong (and to some extent China), credit
growth has decelerated sharply in the past few years after rapid growth in 2009.
Based on the private-sector DSR metric (interest expense plus principal repayment
relative to GDP), Korea is clearly the most debt-burdened, followed by Hong Kong
and China.
The BIS‟ private non-financial sector debt database includes both domestic and
external borrowings. We do not distinguish between domestic and external borrowings.
Figure 1: Scorecard: Private-sector leverage
China
Hong Kong
India
Korea
Singapore
Malaysia
Indonesia
Thailand
Australia
Japan
Philippines
Taiw an
Private credit
% GDP
↗
↑
↗
↑
↔
↑
↗
↑
↔
↔
↔
↔
Credit GDP
↗
gap
↓
↓
↔
↑
↔
↑
↘
↑
↔
↔
↔
Credit grow th
vs. LT avg
↔
↓
↘
↓
↗
↗
↑
↑
↔
↗
↔
↘
↗
DSR
↗
↔
↗
↗
↔
↗
↔
na
na
na
na
Note: The fullness of the circles indicates levels.
Hong Kong’s credit growth, credit-GDP gap and DSR are shown using loans for use in Hong
Kong, excluding loans booked in Hong Kong for use elsewhere. Hong Kong credit growth is
calculated on the basis of total credit.
Credit-GDP gap and credit growth vs. LT avg are calculated based on real GDP and real
private-sector credit.
Sources: IMF, World Bank, central banks, Standard Chartered Research
01 July 2013
16
Asia leverage uncovered
Private-sector leverage
Figure 2 below charts a broad range of countries‟ private-sector leverage (private
domestic borrowings relative to GDP) against GDP per capita in PPP terms.
Developing Asia is highly leveraged
relative to peers in other regions
Among EM countries, Asian countries have higher levels of private-sector leverage
than peers in other regions at similar levels of income per capita. We do not think this
is necessarily a cause for concern; it may reflect superior risk characteristics and
debt capacity.
While the more highly leveraged economies do not necessarily face solvency risk,
they do have limited capacity to continue increasing debt at above-GDP growth rates.
To the extent that rising leverage has driven economic growth, slowing credit growth
tempers further growth prospects. A few countries – particularly Indonesia, India and
the Philippines – have very long runways for continued rapid growth.
Credit growth: Identifying credit booms
Recent credit growth
warrants caution
While levels of private-sector leverage across Asia display only a few anomalies that
require our attention, recent credit growth is perhaps more worrisome. Economists
are concerned about credit growth, even when a country‟s absolute level of debt
remains moderate, because credit booms have historically been associated with
financial crises, especially in emerging markets.
Academic work has identified standard growth thresholds associated with a rising risk
of financial-sector instability:
There are pockets of
excessive growth

Nominal private-sector credit growth is above 20%, or real credit growth is
above 15%.

Growth in any one year is more than 1.5 standard deviations above the country‟s
long-term average growth rate.
This suggests that some Asian countries have experienced excessive credit growth
in the past few years. This probably mainly reflects the very loose monetary policy
most Asian central banks have adopted since several G7 central banks
Figure 2: Private non-financial sector credit % GDP vs. GDP per capita, PPP
(Q3-2012)
Asia
300%
Developed economies
DNK
BEL
ESP
GBR
KOR
FIN
FRA
PRT
250%
Private credit % GDP
Other developing economies
200%
HUN
CHN
150%
THA
100%
IND
50%
PHL
IDN
0%
0
GRC
MYS
ZAF
BRA
MEX
10,000
JPN
ITA
POL
TUR
RUS
SWE
NLD
CHE
AUS
AUT
CAN
DEU
NOR
HKG
USA
SGP
TWN
CZE
SAU
ARG
20,000
30,000
40,000
50,000
GDP per capita, PPP (int'l currency units)
60,000
70,000
Note: HKG excludes credit to corporate for use outside Hong Kong.
Sources: IMF, World Bank, central banks, Standard Chartered Research
01 July 2013
17
Asia leverage uncovered
implemented unconventional monetary policies. Extremely low interest rates,
generally high money supply growth, and the prospect of carry-trade inflows if rates
were to rise or the currency strengthen have encouraged a rapid increase in
borrowing. Much of this has been used to finance purchase of real estate and other
financial assets. This has not yet led to a widespread incidence of asset bubbles,
but pockets of vigorous price inflation (Hong Kong and Singapore real estate, for
example) are potential harbingers.
The IMF notices nascent signs of
leverage and risk
These observations echo the concerns articulated in the IMF‟s April 2012 Global
Financial Stability Report (GFSR). The IMF agrees that Asian leverage levels
currently appear benign, but worries that low interest rates and stable conditions are
encouraging excessive corporate borrowing, particularly in foreign currency and from
risk-seeking external investors. Capital inflows contribute to incipient asset price
bubbles, which encourage further and increasingly speculative investment. As a
Figure 3: Asian y/y credit growth (2010, 2011 and 2012)
Nominal y/y credit growth (%)
Dec-10
Dec-11
Real y/y credit growth (%)
Sep-12
Dec-10
Dec-11
y/y credit growth in std dev terms
Sep-12
Dec-10
CH
CH
CH
HK
HK
HK
IN
IN
IN
KR
KR
KR
SG
SG
SG
MY
MY
MY
ID
ID
ID
TH
TH
TH
0%
10%
20%
30%
-5%
0%
5%
10% 15% 20% 25%
-1
0
Dec-11
Sep-12
1
2
Sources: BIS, IMF, Bloomberg, Standard Chartered Research
Figure 4: Private-sector credit growth: Summary of recent trends against 10-year average
Nominal
China
Hong Kong
India
Korea
Singapore
Malaysia
Indonesia
Thailand
Real terms
China
Hong Kong
India
Korea
Singapore
Malaysia
Indonesia
Thailand
Nominal growth
2010
2011


2009
17.8%
9.0%
20.2%
8.2%
6.5%
12.6%
19.0%
7.9%
8.1%
8.0%
5.3%
4.3%
5.4%
5.5%
7.8%
4.9%
34.6%
(1.6)%
16.2%
6.8%
2.3%
8.1%
6.5%
2.9%
29.1%
24.9%
19.6%
7.4%
6.5%
12.6%
20.3%
11.6%
12.4%
8.8%
12.8%
5.7%
4.9%
8.2%
8.2%
4.5%
9.9%
7.3%
5.5%
4.9%
7.2%
5.3%
7.2%
4.8%
35.4%
(1.2)%
9.6%
3.3%
2.3%
15.0%
(1.6)%
1.0%
21.0%
24.4%
9.9%
3.7%
(1.8)%
8.2%
11.2%
7.6%
2012
2009
Std dev
2010
2011
2012
11.0%
15.5%
18.4%
8.3%
12.6%
13.6%
27.5%
16.2%
15.3%
3.1%
16.5%
6.4%
10.7%
11.8%
23.7%
13.9%
2.06
-1.32
-0.75
-0.32
-0.79
-0.82
-1.60
-1.03
1.38
1.98
-0.12
-0.18
0.00
0.00
0.15
0.75
-0.84
0.81
-0.35
0.02
1.14
0.19
1.07
1.69
-0.31
-0.74
-0.70
-0.43
0.77
-0.14
0.59
1.22
3.0%
11.2%
9.3%
6.4%
12.1%
7.7%
17.6%
11.5%
13.2%
(0.8)%
8.1%
3.1%
8.4%
10.9%
18.3%
12.5%
2.33
-1.37
-0.59
-0.49
-0.36
1.29
-1.36
-0.74
0.87
2.13
-0.54
-0.41
-0.93
0.00
0.43
0.65
-0.96
0.33
-0.63
0.15
1.00
-0.08
1.31
1.45
0.08
-1.31
-0.86
-0.52
0.49
0.53
1.41
1.65
Note: Mean and standard deviations of real credit growth are for the 10-year period from 2003-12. Figures highlighted in bold and red exceed
the BIS’ rule-of-thumb standard for a credit boom. Figures in bold and black highlight growth that is elevated but does not meet the strict
standard of a credit boom – >1σ but <1.5σ above 10-year average.
Sources: BIS, IMF, Bloomberg, Standard Chartered Research
01 July 2013
18
Asia leverage uncovered
result, some developing economies are increasingly vulnerable to external shocks.
The GFSR warns that some developing Asian economies have already started to
show signs of asset quality deterioration; reported credit costs particularly understate
the deterioration in India and China.
Private-sector debt service ratio (DSR)
It is now possible to present the overall private-sector DSR. This measure includes
both the corporate and household sectors, but suffers from the drawback that GDP is
an imperfect substitute for income or cash flow as a proxy for debt
repayment capability.
Korea’s private-sector DSR
stands out
Korea has the highest overall repayment burden based on this metric. Singapore‟s is
also high in absolute terms, but one might argue that this is appropriate to the
country‟s long history of accumulation of financial assets, structural stability and high
level of economic development. We are more concerned about China, with its
uncomfortable combination of high leverage, recent high credit growth and stretched
solvency metrics.
At the other extreme, Indonesia‟s DSR is very low. We believe this positions the
country well to withstand any solvency stress that might result from commodity cycle
weakness, a deteriorating current account position or other macroeconomic stresses.
DSRs are not wildly out of line with
historical averages
Trends in DSRs across the region are generally benign. Figure 6 shows that overall
private-sector DSRs have risen steadily over the past decade (albeit to still-moderate
levels) in India and Malaysia; have jumped over the past few years in China, Hong
Kong and (to a lesser extent) Thailand; and have remained stable or declined in
Singapore and, surprisingly, in Indonesia.
A scan of Asia‟s private-sector borrowing levels suggests a generally manageable
situation and a low likelihood of near-term financial system stress. However, we
agree with the IMF‟s concerns about recent growth in some countries, and its
assessment that another burst of significant credit growth could create a much more
challenging solvency environment. We are concerned about overall leverage levels in
China and Korea. We believe that credit growth trends merit close monitoring in
China, Hong Kong, Malaysia and Thailand.
Figure 5: Private-sector DSR
Current interest rates
30%
Current interest rates + 100 bps
25%
20%
15%
10%
5%
0%
CH
HK
IN
KR
SG
MY
ID
TH
Sources: IMF, World Bank, central banks, Standard Chartered Research
01 July 2013
19
Asia leverage uncovered
Figure 6: Selected countries: Private-sector DSRs, 2001-12 (%)
China
Hong Kong
18%
25%
16%
20%
14%
12%
15%
10%
8%
10%
6%
4%
5%
2%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
India
Korea
14%
30%
12%
25%
10%
20%
8%
15%
6%
10%
4%
5%
2%
0%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Singapore
Malaysia
18%
16%
16%
14%
14%
12%
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Indonesia
Thailand
7%
18%
6%
16%
14%
5%
12%
4%
10%
3%
8%
6%
2%
4%
1%
2%
0%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Note: Hong Kong analysis is based on loans for use in Hong Kong, not total loans booked.
Sources: BIS, Central banks, Standard Chartered Research
01 July 2013
20
Asia leverage uncovered
Corporate leverage
Summary and overview
This section addresses corporate leverage from two perspectives: top-down
aggregates and bottom-up corporate solvency ratio analyses. Our key top-down
metric is aggregate (listed and unlisted) corporate sector credit as a percentage of
GDP. This provides cross-sector comparability and consistency. We also deploy a
set of solvency metrics based on company-level data across the listed
non-financial universe.
Our mosaic of top-down and bottom-up information suggests whether the leverage
resides primarily in the listed sector, mainly in the unlisted sector, or pervades both.
The arrows indicate the pace and acceleration of credit growth. In addition to
leverage level, high credit growth consistently features as a reliable indicator of future
solvency stress and financial instability.
China’s corporate leverage
is pervasive
Across the range of metrics we use, China‟s corporate sector is the most leveraged
and solvency-challenged in the region. High leverage spans both the listed and
unlisted sectors. Furthermore, leverage and solvency metrics deteriorated in 2012
relative to the previous year. Hong Kong‟s overall corporate sector leverage is
somewhat higher, but this probably reflects more credit to SMEs; Hong Kong‟s listed
corporates have much better solvency metrics.
Korea’s high leverage appears most
problematic in the unlisted sector
Korea is the second-most worrisome country in terms of corporate solvency. We
believe that Korea‟s corporate solvency problem resides primarily in the unlisted
sector. Corporate debt/equity is also high, but on some metrics it is only slightly
higher than Singapore‟s. High top-down corporate credit/GDP therefore suggests
disproportionately high leverage in Korea‟s unlisted (largely SME) borrower segment.
Because this segment tends to be fragile in all countries, high SME leverage is a
significant source of asset quality stress. We believe that the highly leveraged SME
sector is a significant contributor to Korea‟s persistently high credit costs.
Figure 1: Corporate leverage scorecard
Corp credit %
↗
GDP
China
Hong Kong
India
Korea
Singapore
Malaysia
Indonesia
Thailand
Australia
Japan
Philippines
Taiw an
↑
↗
↑
↔
↑
↔
↔
↔
↔
↗
↔
↘
Debt / Equity
↗
↘
↗
↘
↔
↗
↓
na
na
na
na
Listed corporates
Interest
↗
Debt / EBITDA
coverage
↓
↑
↑
↘
↔
↓
↑
↗
↑
↑
↘
↔
↗
↘
↑
na
na
na
na
na
na
na
na
DSR
↑
↔
↗
↑
↗
↓
↗
↓
na
na
na
na
Note: The fullness of the circles indicates levels. A fully black circle for debt/equity, debt/EBIT or
DSR is undesirable, and a fully black circle for interest coverage is desirable. The direction of
the arrow indicates rising or falling level, not improvement or deterioration. The arrows’ slope
indicates the pace of change.
Sources: BIS, IMF, Standard Chartered Research estimates
01 July 2013
21
Asia leverage uncovered
India’s stresses are concentrated in
listed companies
India is Korea‟s mirror image: fairly low overall leverage across the corporate sector,
but apparently higher leverage among listed companies than in the unlisted universe.
We suspect that this may reflect unlisted enterprises‟ relatively poor access to the
credit system.
ASEAN’s corporate leverage
is benign
Indonesia, followed by Malaysia, appears to have the lowest corporate leverage
across both the listed and unlisted sectors. In Indonesia, low business leverage
combines with low household leverage to drive extremely low overall private-sector
borrowings and huge private-sector financial flexibility. In Malaysia, low corporate
leverage partly balances the stresses that may be generated by high household
borrowings. Thailand is similar, with very manageable leverage – particularly in the
unlisted sector, based on our metrics.
Top-down: Approach and findings
Figure 2 below shows total corporate borrowings relative to GDP across the range of
Asia-Pacific markets we address in this report. This assessment is based on BIS
estimates of corporate borrowings. We have not cross-checked these estimates
against alternative approaches. (There are no immediately obvious alternatives.)
We make minor adjustments to the
data to better reflect real risks
We make two adjustments to the BIS data. For Hong Kong, BIS data includes all
corporate credit, even if the borrower‟s domicile, main activities and deployment of
funds are in mainland China or other jurisdictions. Because Hong Kong is an
international (particularly China-related) financing centre, loans extended in Hong
Kong do not directly relate to Hong Kong‟s GDP. We have therefore segregated
loans for use in Hong Kong from other loans booked in Hong Kong. Our figures for
China‟s corporate debt exclude loans to LGIVs. (We treat these as obligations of
government, not part of corporate credit.)
Our initial impression is that the corporate sectors of China, Hong Kong and Korea
have high debt outstanding relative to total GDP. Corporate leverage on this measure
is surprisingly low in Malaysia and Thailand; we would have expected both to be well
above India‟s level. Indonesia, as expected, has exceptionally low leverage on this
metric – consistent with views across other sectors and measures.
Figure 2: Corporate credit % of GDP, Q3-2012
Loans for use outside Hong Kong
200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
CH
HK
IN
KR
SG
MY
ID
TH
AU
JP
PH
TW
Sources: BIS, IMF, Standard Chartered Research estimates
01 July 2013
22
Asia leverage uncovered
Alternative: Bottom-up corporate solvency assessment
To address these difficulties, we think a more robust approach is to perform
traditional corporate solvency assessments based on bottom-up debt, cash-flow and
balance-sheet information. This approach has a significant limitation: these analyses
are performed on a company-by-company basis, which is possible only for a narrow
segment of the business sector – listed corporations that provide audited
financial information.
Prominence of listed companies’
borrowings varies across countries
In this spirit, we have constructed solvency analyses at the individual company level
for a universe of approximately 9,000 private non-financial listed corporations. These
together account for approximately 20% of total non-financial corporate borrowings,
ranging from about 13% in China (where unlisted state-owned enterprises account
for the bulk of borrowings) to about 60% in Singapore (where even many of the larger
state-sponsored firms are publicly listed).
While this coverage is by no means comprehensive, we suspect that a database
limited to publicly listed firms fairly represents relative leverage across countries and,
more importantly, trends over time. Smaller unlisted firms probably have weaker
overall solvency than listed peers in every country. However, our past work with
unlisted firms suggests that their solvency cycles and longer-term trends follow a
similar trajectory to their listed peers‟.
We use only a few mainstream
credit metrics
The range of corporate solvency frameworks is very broad. Even accounting-based
metrics relevant to leverage analysis range from very short-term liquidity metrics
(cash and cash flow relative to short-term obligations) to more structural measures,
such as capital leverage. In addition, each industry has different levels of cyclical
volatility and capital leverage, and therefore different ranges of sustainable or
efficient financial leverage. One would not expect a food company to operate with the
same financial leverage as a semiconductor maker. So a corporate solvency
framework could use a range of metrics to address financial and operating leverage,
as well as the distinction between structural leverage and cyclical metrics. Figure 4
outlines such a framework and set of metrics.
Figure 3: Listed company credit (% of GDP) and number of listed non-financial
corporations included in database, Q3-2012
CN
1,542
HK
819
IN
2,844
KR
1,640
SG
528
MY
1,898
ID
319
TH
443
Asia 8
9,033
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Note: Numbers on the right hand side of the chart indicate the number of companies included
Sources: Bloomberg, BIS, IMF, Standard Chartered Research estimates
01 July 2013
23
Asia leverage uncovered
Figure 4: Corporate solvency: Framework and metrics
BUSINESS DYNAMICS & DRIVERS
CONSTRUCTS
 Financial leverage
 Operating leverage
Structural risk attributes
 Intrinsic business risk
characteristics
 Financing choices
 Sales variability
Oscillating conditions
 Liquidity
 Business & performance
conditions
 Financing market conditions
 Coverage
 Profitability
METRICS








Debt / equity
Fixed assets / sales
Fixed / total assets
σ /μ sales
Current ratio
Quick ratio
Debt/EBITDA
EBITDA/ interest
expense
 Return on assets
 Gross margin
Source: Standard Chartered Research
This report treats corporate solvency more simply. We are concerned specifically
about leverage, so we focus on corporate solvency metrics that depend at least in
part on the quantity of borrowings: financial leverage (structural) and coverage ratios
(cyclical). We track three specific metrics:

Debt/equity

Debt/EBITDA

Debt coverage ratio (EBITDA/estimated interest and principal obligations)
The complex topics of operating leverage, sales variability, liquidity and profitability
are therefore outside our current scope. However, the financial leverage metrics we
use capture both structural leverage attributes and risks associated with the
cash-flow cycle.
Structural leverage: Debt/equity across the listed universe
Figure 5 below presents the median and highest-quintile debt/equity ratios across
eight Asian markets as of Q3-2012. For comparison, Figure 6 shows the
corresponding aggregate corporate borrowings relative to GDP for the same period,
based on the BIS credit database.
Median levels best represent overall corporate sector in each country, but we are
also concerned about the solvency of the weakest firms. As Figure 5 shows, the
Figure 5: Asia listed companies: Debt/equity, 2012 (%)
Median
CH
Top quintile
Figure 6: Corporate credit as % of GDP, September 2012
CH
HK
HK
IN
IN
KR
KR
SG
SG
MY
M…
ID
ID
TH
TH
0
Loans for use
outside Hong Kong
40
80
120
160
0%
50%
100%
150%
200%
Note: Median and quintile express groupings by number of firms, not by total debt or equity.
Sources: BIS, Bloomberg, Standard Chartered Research
01 July 2013
24
Asia leverage uncovered
corporates with the highest leverage are weakest in China and India. This reinforces
our concern about listed corporates‟ solvency in India. China‟s situation is even more
worrisome, since the high level of corporate debt across listed and unlisted
corporates suggests a larger, more pervasive latent debt quality issue.
Figure 7 below shows the share of total loans to listed companies in each leverage
quintile. While we would expect loans to the most highly leveraged quintile to account
for well above 20% of the total, China‟s dramatic skew of listed corporate borrowing
volume towards the most leveraged firms is a cause for concern.
Debt/equity tends to remain
relatively stable over time
We expect debt/equity across large groups of firms to remain stable over time. A
firm‟s debt/equity is a function of its technology, capital intensity, operating leverage,
cyclicality and other durable industry-specific characteristics. Consistent with this,
most firms target a long-run capital structure. Evidence of sharply rising debt/equity
should prompt concerns about possible excessive borrowing and the deterioration of
underwriting standards. Data from Asian listed corporates bears out this expectation.
Figure 7: Country borrowing mix by debt/equity quintile, 2012
Lowest quintile
Lower middle
Middle
Upper middle
Highest quintile
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
CH
HK
IN
KR
SG
MY
ID
TH
Sources: Bloomberg, Standard Chartered Research
Figure 8: Asia listed corporations: Debt/equity – 2012 and average over 2002-12 (%)
Median
Top quintile
Median, 2012
70
Avg (10Y median values)
Top quintile, 2012
180
Avg (10Y top quintile)
160
60
140
50
120
40
100
30
80
60
20
40
10
20
0
0
CH
HK
IN
KR
SG
MY
ID
TH
CH
HK
IN
KR
SG
MY
ID
TH
Sources: Bloomberg, Standard Chartered Research
01 July 2013
25
Asia leverage uncovered
Oscillating stress conditions: Cash flow coverage
More cyclically sensitive metrics
While our key „structural‟ leverage metric, debt/equity, has remained quite stable over
the past decade, more cyclically -sensitive metrics paint a more sobering picture of
conditions and trends in corporations‟ ability to service their debt obligations from
current cash flow. We gauge this on three metrics: debt/EBITDA, EBIT/interest
expense, and debt service ratio (DSR).
Debt/EBITDA
Figure 9 below provides a snapshot of Asian listed corporates‟ debt/EBITDA,
presenting both the median and the most highly leveraged quintile of firms in each
listed universe. We present this data for 2012 and a 10-year average of debt/EBITDA
for the median and top-quintile firm in each market.
Stress is currently elevated in
some markets
This data suggests heightened potential for cycle-related stress. Across most
markets, median debt/EBITDA is currently significantly above the 10-year average.
The increase is sharpest in Hong Kong and Singapore; but is perhaps most
worrisome in China. For example, debt/EBITDA for the most highly leveraged quintile
in China is currently nearly 10x. Levels in Korea are also worrisome (and these do
not include unlisted corporates, where we believe most of the worst leverage
difficulties reside.)
Debt/EBITDA may mean-revert with
cyclical cash flow improvements
This deterioration in debt/EBITDA levels, compared with relatively stable debt/equity,
suggests that EBITDA generation is currently relatively low. This typically reflects
some combination of weak asset turns (sales/assets) and weak margins (gross or
operating). EBITDA generation tends to vary, sometimes sharply, from period to
period; so high leverage metrics originating from low EBITDA are potentially
reversible as cash generation improves.
Again, the most leveraged quintile
accounts for significant borrowings
We are naturally most concerned about the most highly leveraged group, and it is
worth noting that the companies in this group account for a substantial portion of total
listed company borrowings. According to Figure 10, the most highly leveraged
quintile of firms accounts for anywhere between 20% of total listed company
borrowings in Indonesia to about 50% in India and Singapore. (Debt/EBITDA for both
the listed universe and the most highly leveraged quintile is much lower in these
countries than in China.)
Figure 9: Asia listed corporates: Debt/EBITDA
Median and average of last 10Y median (%)
Median, 2012
4.0
Top quintile and average of last 10Y top quintile (%)
Avg (10Y median values)
Top quintile, 2012
12
3.5
Avg (10Y top quintile)
10
3.0
8
2.5
6
2.0
1.5
4
1.0
2
0.5
0.0
0
CH
HK
IN
KR
SG
MY
ID
TH
CH
HK
IN
KR
SG
MY
ID
TH
Sources: Bloomberg, Standard Chartered Research
01 July 2013
26
Asia leverage uncovered
Interest coverage and DSRs
Figure 11 below shows the aggregate DSR for the listed universe in each country, at
current interest rates and at rates 100bps higher. The chart on the right shows pure
interest coverage ratios. Unsurprisingly, in Hong Kong and Singapore, interest
coverage is much lower than DSRs.
Some readers may be surprised at the high DSRs in many countries, particularly
relative to the household sector DSRs presented earlier. We think this is because
companies are going concerns and therefore are not expected to pay debts down,
ultimately to zero, in the way that households are expected to do over time. In this
light, we turn our attention to interest coverage ratios, because companies are
obviously expected to meet their debt obligations. High interest coverage ratios in
India, China and Korea are warning signals, in our view.
Figure 10: Country corporate borrowings by debt/EBITDA quintile, 2012
% of corporate borrowings
Lowest quintile
Lower middle
Middle
Upper middle
Highest quintile
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
CH
HK
IN
KR
SG
MY
ID
TH
Sources: Bloomberg, Standard Chartered Research
Figure 11: Debt service ratios, 2012
Current interest rates
90%
Figure 12: Interest coverage ratios
Current interest rates + 100 bps
60%
80%
50%
70%
60%
40%
50%
30%
40%
30%
20%
20%
10%
10%
0%
0%
CH
HK
IN
KR
SG
MY
ID
TH
Sources: BIS, Bloomberg, Standard Chartered Research
01 July 2013
CH
HK
IN
KR
SG
MY
ID
TH
Sources: BIS, Bloomberg, Standard Chartered Research
27
Asia leverage uncovered
Figure 13: Selected countries: Listed corporate debt/EBITDA, median and highest quintile, 2002-12 (%)
China
Hong Kong
12
8
Top quintile
10
Top quintile
7
6
8
5
6
4
Median
4
Median
3
2
2
1
0
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
India
Korea
7
8
6
7
Top quintile
5
Top quintile
6
5
4
4
3
Median
Median
3
2
2
1
1
0
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Singapore
8
Malaysia
Top quintile
7
6
Top quintile
5
6
4
5
4
3
3
Median
2
2
Median
1
1
0
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Indonesia
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Thailand
12
7
10
6
Top quintile
5
8
4
6
Top quintile
4
3
Median
2
Median
2
0
1
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: Bloomberg, Standard Chartered Research
01 July 2013
28
Asia leverage uncovered
Figure 14: Selected countries: Listed corporates’ debt service and interest burden ratios, 2002-12 (%)
China
Hong Kong
Debt service
ratio
80%
70%
120%
100%
60%
Debt service
ratio
80%
50%
Interest
burden ratio
40%
30%
60%
40%
20%
Interest
burden ratio
20%
10%
0%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
India
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Korea
90%
Debt service
ratio
80%
100%
90%
Debt service
ratio
80%
70%
70%
60%
Interest
burden ratio
50%
40%
60%
50%
Interest
burden ratio
40%
30%
30%
20%
20%
10%
10%
0%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Singapore
Malaysia
90%
90%
80%
Debt service
ratio
70%
80%
70%
60%
60%
50%
50%
40%
40%
30%
30%
Interest
burden ratio
20%
10%
0%
Debt service
ratio
Interest
burden ratio
20%
10%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Indonesia
Thailand
90%
90%
80%
80%
70%
70%
60%
60%
50%
Debt service
ratio
40%
30%
50%
40%
30%
20%
Interest
burden ratio
10%
0%
Debt service
ratio
Interest
burden ratio
20%
10%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: Bloomberg, Standard Chartered Research
01 July 2013
29
Asia leverage uncovered
Household borrowings
Summary
Leverage levels vary, but low-risk
mortgages dominate in
every country
Household leverage varies sharply across Asia, with local wrinkles in each country.

The surprising high-leverage outliers are Singapore and Malaysia, particularly
the latter. We believe high borrowings, concentrated in mortgages, reflect a
build-up of savings in mandatory provident fund schemes against which
households are allowed to take on mortgage debt. These household sectors
remain highly solvent from a balance-sheet perspective. Nonetheless, high
DSRs, particularly when combined with sharp property price appreciation,
suggest caution.

Thailand‟s households display a combination of moderately high borrowing
levels and recent increases in household borrowings. While this does not yet
suggest an imminent spike in credit costs, it merits careful monitoring.

Korea‟s aggregate household leverage is high across all leverage metrics. We
suspect that Korean household credit figures may be distorted by the inclusion of
an unusually large quantity of small business loans. Korea‟s household sector
warrants ongoing concern and monitoring.

Indonesia, India and China show low leverage and high growth potential.

Hong Kong‟s household leverage remains moderate, and the cushion of low
leverage ratios is further supported by strong macro-prudential policies.
Figure 1 below summarises the current state of household credit across the region
on key leverage and solvency metrics.
Figure 1: Household sector leverage scorecard
China
Hong Kong
India
Korea
Singapore
Malaysia
Indonesia
Thailand
Australia
Japan
Philippines
Taiw an
HH credit %
GDP
↑
↔
↔
↔
↔
↑
↑
↑
↔
↔
↑
↔
Borrow ing /
HH incom e
↑
↔
↔
↗
↑
↑
↔
↑
na
na
na
Interest
↗
burden
↔
↔
↑
↗
↑
↔
↗
↑
↑
↑
na
na
↗
na
↔
DSR
↑
↗
↔
↗
↑
na
na
na
na
Note: The fullness of the circles indicates the end-2012 level, calibrated on a relative scale from
lowest to highest across the markets included in the table. The arrows indicate the recent
degree of acceleration in growth – a function of 2012 growth against the country’s recent 3- and
10-year growth trends.
Sources: IMF, World Bank, central banks, Standard Chartered Research
01 July 2013
30
Asia leverage uncovered
Household leverage overview
Figure 2 below summarises the status of household financial leverage across key
Asian countries and across a range of metrics. Our purpose here is to establish a
baseline measure of credit market saturation and capacity for further borrowing, and
to identify countries where households already have high levels of borrowing that
may constitute a source of elevated credit risk.
Measuring household credit: Consumer vs. small business
Consumer product aggregation
captures only part of
total borrowings
The BIS‟ new estimates for aggregate household borrowings include both consumer
credits and business (including farm) credits incurred by households. We previously
estimated household borrowings based on an aggregation of loans by product
category, focusing on consumer credit: mortgages, credit card revolvings, auto loans
and other consumer credit. This was the basis for an earlier SCout report, Personal
financial services in Asia. The new broader inclusion improves our measures of
household solvency.
Figure 2: Asia-Pacific countries: Key metrics of household leverage and repayment burden, 2012
Unit
CH
HK
IN
ID
KR
MY
SG
TW
TH
AXJ
USD
6,076
36,668
1,492
3,592
23,113
10,304
51,160
20,328
5,678
3,039
USD bn
3,021
185
1,158
593
711
135
130
365
271
6,569
%
37%
70%
63%
68%
61%
45%
47%
77%
74%
48%
Total loans
USD bn
9,845
476
1,291
286
1,448
357
326
788
318
15,135
Total household credit
USD bn
1,419
147
384
141
1,031
247
197
346
258
4,170
Household credit % of GDP
%
17%
56%
21%
16%
89%
81%
71%
73%
71%
31%
Household credit % of total loans
%
14%
31%
30%
49%
71%
69%
60%
44%
81%
28%
Debt balance/HH income
%
47%
79%
33%
24%
145%
182%
151%
95%
95%
63%
Debt balance/HH financial assets
%
14%
11%
21%
42%
47%
45%
16%
17%
53%
20%
Interest expense/HH income
%
2.3%
1.8%
3.5%
7.1%
7.4%
7.3%
2.4%
7.1%
3.5%
GDP per capita
Household income
Household income % of GDP
5%
Note: ‘Financial assets’ in this report refers to relatively liquid household financial assets excluding real estate.
Sources: Global Demographics, CEIC, central banks and finance ministries, Bloomberg, Standard Chartered Research estimates
Figure 3: Korea, composition of HH debt
Mortgages
Credit card debt
Margin loans
Other
100%
80%
60%
40%
20%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sources: IMF, CEIC, central banks and finance ministries, Bloomberg,
Standard Chartered Research estimates
01 July 2013
31
Asia leverage uncovered
Korea’s debt figures include lots of
uncategorised borrowing
There has long been an anomaly in household borrowing figures for Korea – our
product-level aggregation (mortgages, cards and other consumer loans) did not
come close to total levels of household borrowing indicated by the aggregate sector
balance sheets derived from Korea‟s national flow-of-funds accounts. Korea‟s
household borrowing data is opaque. Mortgages account for only about 40% of total
household borrowings; a high proportion of total household loans is categorised
as „other‟.
We ascribe much of this to smallbusiness lending
While there is no definitive explanation for this, it must derive from failure to capture
either consumer loans extended by non-bank financial institutions, or loans to
households for purposes other than consumption – particularly business loans to
households in their role as small businesses.
Consistent with the importance of
SMEs in Korea
With small SMEs such a significant segment of Korean‟s economy, and given banks‟
failure to capture and report household loans other than mortgages, jeonse and
credit cards, we believe that loans to household businesses explain virtually all of the
gap between an estimate based on product aggregation and figures on households‟
total borrowings.
India – We include farm loans in the
household segment
In India, we face a slightly different situation. Figures reported by the BIS also exceed
our aggregation based on identifiable consumer loans. We believe this is attributable
to household lending by some non-bank financial institutions that our calculations do
not capture. (While we do capture lending by the main non-bank mortgage lenders
and the vehicle finance providers, we do not capture margin loans and some other
non-bank consumer loans.)
However, we believe that the BIS data omits a significant segment of household
borrowings – loans to farmers, which in India are essentially all households. These
account for about INR 6.7tn of the estimated total loans of INR 16tn at end-2012,
significantly larger than total mortgages outstanding of about INR 4.1tn.
Figure 6 below shows our estimates of total household borrowings (relative to
household income as the basis for comparison), segregated between consumer
credit and business or farming loans.
Figure 4: Korea 2012 consumer vs. business HH credit
Figure 5: India 2012 consumer vs. business HH credit
KRW bn
INR bn
Mortgages
Cards
Margin loans
1,200,000
20,000
Mortgages
18,000
1,000,000
800,000
Auto
Agricultural loans/
NBFC loans
16,000
Small business /
agricultural loans
Cards
14,000
Margin loans/ other
consumer loans
12,000
10,000
600,000
8,000
400,000
6,000
4,000
200,000
2,000
0
0
Consumer
BIS HH
Consumer
BIS HH
SCB HH
Sources: CEIC, central banks and finance ministries, BIS, Bloomberg,
Sources: CEIC, central banks and finance ministries, BIS, Bloomberg,
Standard Chartered Research estimates
Standard Chartered Research estimates
01 July 2013
32
Asia leverage uncovered
Figure 6: 2012 HH debt as % of income: Consumer vs. household business
200%
Business
180%
160%
140%
120%
100%
Consumer
80%
60%
40%
20%
0%
China
Hong Kong
India
Korea
Malaysia Indonesia Singapore Taiwan
Thailand
Note: Household business includes farms in India
Sources: IMF, CEIC, central banks and finance ministries, Bloomberg,
Standard Chartered Research estimates
Figure 7: HH borrowings as % of HH income: breakdown by product, 2012
as % of HH income
CH
HK
IN
KR
MY
ID
SG
TW
TH
41%
63%
8%
51%
102%
4%
111%
63%
28%
Cards
2%
1%
0%
10%
10%
1%
5%
14%
3%
Auto
1%
0%
2%
0%
38%
12%
8%
3%
10%
Margin loans
0%
0%
0%
1%
13%
2%
0%
4%
0%
44%
65%
11%
61%
162%
19%
124%
84%
42%
3%
15%
22%
84%
20%
7%
27%
11%
54%
47%
79%
33%
145%
182%
26%
151%
95%
96%
3%
4%
1%
-10%
-5%
0%
-4%
-30%
-5%
50%
83%
34%
135%
177%
26%
147%
65%
91%
Mortgage
Consumer loans
Others (business loans)
Consumer & business total
Unexplained
Total HH loans
Sources: CEIC, central banks and finance ministries, BIS, Bloomberg, Standard Chartered Research estimates
01 July 2013
33
Asia leverage uncovered
Household leverage metrics
High-level metric: Household borrowings as % of GDP
We begin our exploration of household leverage with household borrowings relative
to GDP. This metric is useful because it is readily available across a broad range of
countries, providing broad context. This breadth helps to establish, for example, that
household borrowings relative to GDP rise as economies become wealthier.
Household debt relative to GDP suffers from a serious flaw, however – GDP is not a
good proxy for household income, because household income as a percentage of
GDP varies widely across countries.
Household borrowings relative to income and assets
More specific metrics – debt relative to household income and assets, and estimated
DSRs – are more useful for understanding household borrowing capacity and
solvency. These metrics recognise that consumer credit must be repaid from
household income.
Figure 8: HH borrowing relative to GDP vs. GDP per capital in PPP terms (%, USD)
Selected economies
Selected Asian economies
DNK
NLD
140%
120%
PRT
GBR
USA
IRL
AUS
NZL
KOR CAN
ESP
SWE
MYS
THA
JPN
EST GRC FIN FRA TWN
DEU
ITA
AUT
LVA
SVK
BEL
LTU
HUN
SVN
ROM HRV POL
CHN
IND IDN
100%
80%
60%
40%
20%
0%
0
10,000
20,000
30,000
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Household Financial Liabilities
(%GDP), %
160%
40,000
SGP
HKG
Korea
Malaysia
Thailand
Hong Kong
Indonesia
India
China
0
50,000
60,000
Singapore
Taiwan
70,000
20,000
40,000
60,000
80,000
GDP / Capita, PPP terms (Int'l dollars)
Note: Updated to 2012 for Asian economies and to 2009 for other economies.
Sources: IMF, CEIC, central banks and finance ministries, Bloomberg, Standard Chartered Research estimate
Figure 9: Household income as a % of GDP
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Taiwan
Thailand Hong Kong Indonesia
India
Korea
Asia 9 Singapore Malaysia
China
Sources: IMF, Global Demographics, Standard Chartered Research estimate
01 July 2013
34
Asia leverage uncovered
In Singapore and Malaysia, we need
to look at leverage on both income
and assets
Household leverage in Singapore and Malaysia is distorted by local practices. Both
countries have mandatory pension schemes that compel households to save a high
proportion of income; in both countries, households are permitted to take home
mortgages secured by their fund balances. The net effect is that households are
encouraged to borrow more than they otherwise would; as a result, household
borrowings/income are high in both countries. However, in Singapore, a long period
of high household savings rates has caused a large accretion of liquid financial
assets, so that borrowings/financial assets look quite manageable. (This is not the
case in Malaysia, perhaps because the pension programme has not been
contributing to financial asset accumulation for as long.)
Mandatory savings drive financial
asset accumulation relative
to income
The net effect is that we are not concerned about household solvency in Singapore,
but we are moderately concerned about the leverage of Malaysian households.
Korea stands out as highly leveraged across the full range of household leverage
and solvency metrics. This is not a new phenomenon; official statistics have shown
high household leverage in Korea for many years.
Korea’s household leverage is
chronically high
However, there are reasons for concern. First, we have seen that Korea‟s household
sector (unlike Singapore‟s, for example) is capable of generating significantly
elevated credit costs. In 2002-03, a surge in credit card borrowing by Korean
households triggered a spike in personal loan defaults, the failure of several credit
card monoliners and significant losses for domestic banks.
Figure 10: HH borrowings/income, 2012
Figure 11: HH borrowings/HH financial assets, 2012
200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
60%
50%
40%
30%
20%
Sources: IMF, CEIC, central banks and finance ministries, Bloomberg,
Standard Chartered Research estimates
01 July 2013
Thailand
Taiwan
Singapore
Indonesia
Malaysia
Korea
India
Hong Kong
0%
China
Thailand
Taiwan
Singapore
Indonesia
Malaysia
Korea
India
Hong Kong
China
10%
Sources: IMF, CEIC, central banks and finance ministries, Bloomberg,
Standard Chartered Research estimates
35
Asia leverage uncovered
Figure 12: Selected countries: HH borrowings as a % of income and assets, 2000-12 (%)
China
Hong Kong
50%
16%
90%
25%
14%
40%
HH
debt/assets
(RHS)
30%
HH
debt/income
(LHS)
12%
10%
80%
20%
15%
8%
20%
6%
HH
debt/income
(LHS)
10%
0%
2000
4%
2%
0%
2002
HH
debt/assets
(RHS)
70%
2004
2006
2008
2010
2012
India
60%
2000
10%
5%
0%
2002
2004
2006
2008
2010
2012
Korea
40%
HH
debt/assets
(RHS)
30%
160%
20%
140%
15%
120%
10%
100%
5%
80%
0%
60%
2000
60%
HH
debt/income
(LHS)
55%
50%
HH
debt/income
(LHS)
20%
25%
HH
debt/assets
(RHS)
45%
40%
35%
10%
0%
2000
2002
2004
2006
2008
2010
2012
Singapore
30%
25%
2002
2004
2006
2008
HH
debt/income
(LHS)
150%
140%
22%
20%
18%
130%
200%
HH
debt/income
(LHS)
180%
120%
110%
14%
12%
10%
2002
2004
2006
2008
2010
2012
Indonesia
120%
45%
100%
25%
40%
90%
35%
80%
HH
debt/income
(LHS)
HH
debt/assets
(RHS)
10%
5%
0%
2000
35%
30%
2002
2004
2006
2008
2010
2012
Thailand
30%
15%
55%
45%
HH
debt/assets 40%
(RHS)
140%
100%
2000
60%
50%
160%
16%
HH
debt/assets
(RHS)
20%
2012
Malaysia
160%
100%
2000
2010
2002
2004
2006
30%
70%
25%
60%
20%
50%
15%
40%
2000
60%
HH
debt/assets
(RHS)
55%
50%
HH
debt/income
(LHS)
45%
40%
35%
30%
2008
2010
2012
25%
20%
2002
2004
2006
2008
2010
2012
Sources: CEIC, central banks and finance ministries, BIS, Bloomberg, Global Demographics, Standard Chartered Research estimates
01 July 2013
36
Asia leverage uncovered
Household debt service ratios
Figures 13 and 14 show households‟ interest repayment burden (interest
expense/household income) and DSR (interest plus estimated principal repayment in
each year relative to household income). These are the most robust, comprehensive
measures of households‟ ability to repay their debts from cash flow.
At current interest rates and borrowing levels, Malaysian households clearly stand
out as the most challenged in meeting their interest and total debt obligations.
Malaysian households‟ aggregate interest burden is the highest in Asia (Figure 13),
and their DSR is the highest (Figure 14). Figure 16 provides a 10-year history of
these ratios. Increases in Thailand and Malaysia from moderate and high starting
points, respectively, are perhaps most worrisome. In China and Indonesia, levels
remain low but recent rapid increases raise the spectre of (probably modest) debt
seasoning difficulties. Concerns about high levels of household leverage in Korea
and Singapore are countered by stable or falling leverage in the past decade.
Interest sensitivity of household repayment burden
In times of moderate leverage, sudden increases in interest rates are often the most
important immediate risk. While we do not expect borrowing rates to rise over the next
few years – our base case is continued very low interest rates in Asia – it is useful to
understand which countries‟ households are most sensitive to interest rate risk.
Figure 13: Interest expense as % of household income,
2012
Figure 14: Household DSR: Consumer and total
household borrowings, 2012
7%
20%
6%
16%
Consumer
debt
Total debt
5%
12%
4%
3%
8%
2%
4%
1%
0%
0%
CH
HK
IN
KR
SG
MY
ID
CH
TH
HK
IN
KR
SG
MY
ID
TH
Note: Interest expense as % of household income in Figure 49 refers to the interest expense on consumer debt. We exclude other borrowings
such as agriculture, small business, etc. from our interest expense calculation.
Sources: CEIC, central banks and finance ministries, BIS, Bloomberg, Global Demographics, Standard Chartered Research estimates
Figure 15: Change in DSR due to 100bps increase in interest rates (ppt)
1.2
1.0
0.8
0.6
0.4
0.2
0.0
CH
HK
IN
KR
SG
MY
ID
TH
Sources: BIS, IMF, World Bank, Central banks, Standard Chartered Research estimates
01 July 2013
37
Asia leverage uncovered
Figure 16: Selected countries: Interest expense as % household income and household DSRs, 2002-12
China
Hong Kong
Debt service
ratio
6%
5%
Debt service
ratio
9%
8%
7%
4%
6%
Interest
coverage ratio
3%
2%
5%
4%
Interest
coverage ratio
3%
2%
1%
1%
0%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
India
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Korea
6%
Debt service
ratio
5%
18%
Debt service
ratio
16%
14%
4%
12%
3%
Interest
coverage ratio
2%
Interest
coverage ratio
10%
8%
6%
4%
1%
2%
0%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Singapore
16%
Malaysia
Debt service
ratio
14%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
12%
Debt service
ratio
20%
18%
16%
14%
10%
12%
8%
10%
Interest
coverage ratio
6%
4%
Interest
coverage ratio
8%
6%
4%
2%
2%
0%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Indonesia
Thailand
Debt service
ratio
5%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
14%
12%
4%
Debt service
ratio
10%
Interest
coverage ratio
3%
8%
Interest
coverage ratio
6%
2%
4%
1%
2%
0%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: BIS, IMF, World Bank, Central banks, Standard Chartered Research estimates
01 July 2013
38
Asia leverage uncovered
Household leverage tipping point: US as a benchmark
For an individual household with reasonably stable income flow, a prudent lender
would probably accept borrowings up to about 4x annual income under normal
circumstances. (This is subject to many qualifications: interest rate, borrower history,
macro and employment environment, quality of collateral.) We would be
uncomfortable with this as the average across a country‟s household sector, because
the average would obscure many borrowers with much higher leverage.
US borrowing/income peaked at
about 120% in 2007, with a DSR
of 14%
So there is no readily identifiable level of overall household leverage at which one
should become concerned about rising default risk. Perhaps the most useful
guidelines are the truisms that lower leverage is safer than higher leverage, and that
rising leverage deserves scrutiny. For a broad example of unacceptable risk
accumulation, we look at the US over the past 10 years.
Some Asian countries are already
beyond peak US leverage levels
In the US, household solvency deteriorated badly starting in 2007, when household
debt/income reached 120%, debt/financial assets reached 40%, and the DSR
reached 14%. How do Asian household sectors stack up against these standards?
Malaysia, Singapore and Korea are all above or near these peak levels (see
Figures 10, 11 and 14.) Among these three, we believe Malaysia is most likely to
experience deteriorating solvency in household portfolios because of its combination
of high debt/income, high debt/assets, high DSR, and DSR sensitivity to potential
increases in interest rates.
Household borrowing mix and solvency risk
Mortgages are very low-risk…
Not all loans to households are equally risky. Unsecured and non-consumer
(essentially SME) borrowings are generally higher-risk than mortgages. Evidence
presented in the following section supports the proposition that mortgages in Asia are
a very low-risk asset class relative to all other types of loans in Asia. Mortgages
constitute a high proportion of credit to households in most Asian countries.
Risks differ significantly across
loan categories
In countries where household loans are more skewed toward non-mortgage
products, we expect somewhat higher consumer credit cost metrics. This includes
Korea, India and Thailand, where the quantity of non-consumer household borrowing
is unusually large. In Indonesia (and, to a lesser extent, Malaysia), vehicle finance
accounts for an unusually high proportion of the total.
Figure 17: US Household debt as % of income and assets
Figure 18: US DSR
130%
45%
15%
40%
14%
35%
13%
30%
12%
25%
11%
20%
10%
120%
110%
HH debt/liquid
assets (RHS)
100%
HH
debt/income
(LHS)
90%
80%
2000
2002
2004
2006
2008
2010
2012
Source: Federal Reserve
01 July 2013
2000
2002
2004
2006
2008
2010
2012
Source: Federal Reserve
39
Asia leverage uncovered
Figure 19: HH liabilities mix across Asian economies, 2012
Mortgages
Credit Card Debt
Auto Loans
Margin Loans
Other
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
CH
HK
IN
ID
KR
MY
SG
TW
TH
Asia
Sources: BIS, IMF, World Bank, Central banks, Standard Chartered Research estimates
Figure 20: Asian economies: Household credit products markets – Size and growth by country, 2012
Product market/measure
Unit
CH
HK
IN
ID
KR
MY
SG
TW
TH
AXJ
USD bn
9,845
476
1,291
286
1,448
357
326
788
318
15,135
%
17%
9%
25%
22%
9%
10%
7%
5%
8%
17%
USD bn
1,419
147
384
141
1,031
247
197
346
258
4,170
% of total system loans
%
14%
31%
30%
49%
71%
69%
60%
44%
81%
28%
CAGR, 2003-12
%
22%
5%
21%
25%
9%
12%
6%
5%
12%
14%
USD bn
1,227
117
92
22
360
138
144
230
75
2,406
% of total system loans
%
12%
25%
7%
8%
25%
39%
44%
29%
24%
16%
CAGR, 2003-12
%
24%
4%
21%
28%
8%
20%
6%
5%
11%
16%
USD bn
98
2
32
81
76
82
17
76
37
499
% of total system loans
%
1%
0%
2%
28%
5%
23%
5%
10%
12%
3%
CAGR, 2003-12
%
15%
-5%
16%
20%
16%
17%
3%
13%
18%
20%
USD bn
94
28
260
39
596
27
35
41
146
1,265
% of total system loans
%
1%
6%
20%
14%
41%
8%
11%
5%
46%
8%
CAGR, 2003-12
%
13%
12%
23%
40%
9%
-5%
8%
-3%
12%
14%
Total system loans
Volume outstanding
CAGR, 2003-12
Total household loans
Volume outstanding
Mortgages
Volume outstanding
Other consumer loans
Volume outstanding
Household business
loans
Volume outstanding
Sources: CEIC, central banks and finance ministries, BIS, Bloomberg, Standard Chartered Research estimates
01 July 2013
40
Asia leverage uncovered
Consumer credit growth and change in leverage
We track growth in consumer credit and changes in consumer leverage for two
purposes: (1) from a macroeconomic perspective, to understand the evolving
capacity of leverage to drive consumption and hence growth; and (2) from a financial
system risk perspective, to identify pockets of growth that could result in consumer
credit defaults down the road.
Consumer credit markets across the region are at very different levels of saturation and
growth potential. In Hong Kong and Singapore, the region‟s most developed markets,
household credit has grown more slowly than nominal GDP for most of the past decade.
It is now enjoying a resurgence driven by property investment, but this is probably shortlived. On the other hand, the region‟s less developed countries and consumer finance
markets – such as India, China and Indonesia – will continue to enjoy robust household
credit growth, both in absolute terms and relative to GDP growth.
We are not only concerned about average annual growth over long periods, but also
about recent surges in credit growth. From this perspective, credit growth in Thailand
is particularly concerning. (Hong Kong and Singapore have also seen recent sharp
acceleration, but the skew toward mortgages in these economies, particularly with
Hong Kong‟s strong prudential policies governing mortgage lending, allay our
concerns that growth will lead to asset quality deterioration.)
Figure 21: Household debt CAGR, 1995-2003 and 2003-12
40%
55%
Figure 22: Household debt/GDP – 1995, 2003 and 2012
120%
35%
100%
30%
80%
2003-12
25%
20%
2012
2003
60%
1995-2003
15%
1995
40%
10%
20%
5%
0%
CH
HK
IN
KR
MY
ID
SG
TW
TH
APxJ
0%
CH
HK
IN
KR
MY
ID
SG
TW
TH
Note: Includes both consumer and non-consumer borrowings of households.
Sources: BIS, national sources, Standard Chartered Research estimates.
Figure 23: Consumer credit CAGR, 2003-12 and 2009-12
30%
25%
2003-2012
20%
2009-2012
15%
10%
5%
0%
CH
HK
IN
KR
MY
ID
SG
TW
TH
APxJ
Sources: BIS, national sources, Standard Chartered Research estimates.
01 July 2013
41
Asia leverage uncovered
Public debt
Manageable debt burden, helped by lower bond yields
Broadly, we are not concerned about the sustainability of public debt in Asia, though
we do see pockets of risk. India has a high debt-to-GDP ratio and a high government
DSR. It is also the only Asian country whose current 10Y government bond yield is
higher than its average coupon payment burden. This suggests that India‟s debt
repayment burden will not ease in the coming years, as is the case for most other
Asian countries.
Japan, Korea and the Philippines
have high government DSRs, but
we expect them to decline in the
coming years
Japan, Korea and the Philippines stand out because of their high government DSRs
(see Figure 1). However, we expect these ratios to decline in the coming years, as
current 10Y bond yields in all of these countries are lower than their average
coupon payments.
Japan‟s high DSR is driven by its unprecedented level of outstanding government
debt to GDP. However, in the absence of a sharp spike in JGB yields, we believe this
is sustainable. Large domestic ownership of JGBs also mitigates risk. Korea‟s
interest payment burden is the primary driver of its high DSR, whereas the level of
outstanding debt is not high relative to GDP.
The Philippines‟ public debt burden is likely to decline over time given the large gap
(the largest in Asia) between its present 10Y yield and its average coupon payment
(Figure 6). The Philippines also benefits from a relatively long average debt maturity
(Figure 5), which will enable it to increasingly lock in lower debt financing costs. At
the other end of the spectrum, with low government DSRs, are China, Indonesia,
Malaysia and Australia.
Figure 1: Government debt service ratios
percent
>20
10 - 20
5 - 10
2-5
<2
N.A.
Sources: Bloomberg, Standard Chartered Research.
01 July 2013
42
Asia leverage uncovered
The framework for government debt sustainability
Our debt sustainability equation
incorporates the present level of
debt and the primary balance
The debt sustainability equation below helps to gauge whether government debt
dynamics are becoming unsustainable. In addition to the interest rate (r) and the
GDP growth rate (g), it incorporates the present level of debt (D[t]) and the primary
balance (pb). If the growth rate is lower than the interest rate, the burden falls to the
primary balance to achieve debt sustainability:
D[t] = D[t-1] * (1 + (r – g)) – pb
where
D[t] = debt/GDP at time t
r = average nominal interest cost on debt
g = nominal GDP growth rate
pb = primary balance
Contrary to the view that only the interest rate matters, the starting level of debt to
GDP is also an important factor. The higher the amount owed, the higher the
vulnerability to a sudden rise in the interest burden or a negative growth shock4.
The maximum sustainable debt
level is the level above which
creditors are unwilling to lend
The long-run debt level shown in Figure 2 is assumed to be the level that is
sustainable over the long run (marked d*). If a shock raises debt above this level, the
primary balance (the fiscal balance before taking interest expenses into account) will
have to exceed interest payments in order to return debt to its sustainable long-run
level. The maximum sustainable debt level is the level beyond which creditors are no
longer willing to lend (d-bar in Figure 2). Beyond this level, there is no way to recover
without first defaulting and losing market access. In the real world, this point is
anticipated well before the d-bar is reached, and a higher risk premium is charged for
further debt issuance.
If the primary balance is large enough to compensate for periods when the interest
rate being paid on government debt is higher than the economy‟s growth rate, then
as long as the interest rate does not exceed the growth rate, debt is sustainable. This
fits in directly with the debate underway in Europe, where some argue that lowering
Figure 2: Theoretical foundation for public debt threshold determination
Source: Ostry et al (2010).
4
For more on this see IMF, „Modernizing the framework for fiscal policy and public debt sustainability analysis‟, prepared by the IMF Fiscal Affairs Department (2011)
01 July 2013
43
Asia leverage uncovered
the risk premium on sovereign debt is worth the economic pain caused by the fiscal
austerity forced on countries to make debt dynamics sustainable. However, this is a
tough trade-off, as austerity lowers growth and could therefore create a downward
spiral for growth and debt dynamics.
Maturity profile and contingent
liabilities must be taken into
account, among other factors
There are other important factors to consider when assessing government
debt sustainability:
1.
The maturity profile of government debt is critical. We show the maturity profile
of the countries covered in Figure 5 using Bloomberg data.
2.
The average interest cost on maturing debt versus the marginal interest cost on
new debt determines how the debt burden will evolve over time. We show
estimates of the effective interest rates being paid by governments, and
compare them to the prevailing interest rates being paid for newly issued debt, in
Figure 6.
3.
Contingent liabilities must also be taken into account. A „too-big-to-fail‟,
systemically important financial or non-financial institution can end up as a
liability of the government, as has been seen in the European crisis. Spain‟s
public debt-to-GDP ratio may have looked healthy pre-crisis, but losses from the
private sector were a source of vulnerability.
4.
External debt, i.e. financing from foreign entities, is also important. This is
defined not just as debt denominated in foreign currency, but also debt held by
foreigners that may at some point create pressure to exchange domestic
currency for foreign currency. Japan has a low but rising share of foreign
ownership of its government bonds.
Thresholds for sustainable debt ratios
The threshold at which emerging economies‟ public debt to GDP becomes risky has
risen in recent years, according to studies by the IMF and others. There is now little
difference between the ratios suggested for advanced economies and for emerging
ones. This is in contrast to just a few years ago and reflects structural improvements
in EM fundamentals.
Figure 3: Government debt
Debt/GDP, %
300%
Dec-05
Dec-07
Sep-12
250%
200%
150%
100%
50%
Indonesia
Australia
Hong Kong SAR
Korea
Taiwan
Philippines
Thailand
Malaysia
India
China
Spain
Germany
United Kingdom
France
United States
Singapore
Italy
Japan
0%
Sources: BIS, IMF, Standard Chartered Research
01 July 2013
44
Asia leverage uncovered
Assessing the ‘unsustainable’ level
of government debt to GDP
is controversial
Assessing the level at which government debt to GDP becomes unsustainable is a
controversial issue. In principle, the higher the ratio, the greater the potential for
future problems servicing the debt burden, which diverts funds from more productive
uses and may ultimately weigh on growth. An IMF study from 2002 5 found that a
debt-to-GDP ratio of over 40% was correlated with a sharp rise in the probability of
crisis, to 15-20% from 2-5%.
Reinhart and Rogoff point to a 90%
threshold for government debt
to GDP
Some authors suggest around 90-100% of GDP 6 . In Reinhart and Rogoff‟s wellpublicised and increasingly controversial paper, „Growth in a time of debt‟, they point
out that countries whose debt-to-GDP ratios exceed 90% subsequently see a
Figure 4: Government debt outstanding
USD bn
Thailand
Hong Kong SAR
Philippines
Indonesia
Malaysia
Singapore
Taiwan
Australia
Korea
India
Spain
China
Germany
France
United Kingdom
Italy
113
118
120
127
150
168
177
268
421
698
985
1,347
1,447
2,024
2,036
2,177
Note: Obtained using DDIS on Bloomberg; in nominal USD terms using end-Q3-2012 FX rate
Sources: Bloomberg, Standard Chartered Research
Figure 5: Government debt – Maturity profile
Average maturity of debt outstanding
Hong Kong SAR
Singapore
Korea
United States
Malaysia
Spain
Australia
Japan
Italy
Germany
France
Thailand
China
India
Taiwan
Philippines
Indonesia
United Kingdom
1 yrs
3 yrs
5 yrs
5 yrs
5 yrs
6 yrs
6 yrs
6 yrs
6 yrs
6 yrs
7 yrs
8 yrs
8 yrs
9 yrs
9 yrs
10 yrs
11 yrs
14 yrs
Note: Obtained using DDIS on Bloomberg;
Sources: Bloomberg, Standard Chartered Research
5
6
„Assessing sustainability‟, IMF Policy Development and Review Department (May 2002)
Cecchetti, Mohanty and Zampolli, ‘The real effects of debt‟, BIS Working Paper No. 352 (2011)
01 July 2013
45
Asia leverage uncovered
substantial slowdown in growth. The causality of this argument is important. For
example, has debt risen because of attempts to pump-prime the economy, which fail
due to declining trend growth? Or is the level of debt itself causing weaker growth as
the government leans against recoveries in order to maintain a sustainable debt
ratio? Factors beyond the debt burden may play a role: demographics, investor
confidence, technology, and diminishing productivity-enhancing growth gains.
Figure 6: Government debt – Average coupon vs. current 10Y yield
Japan
Hong Kong SAR
United States
Taiwan
Singapore
France
Germany
China
Malaysia
United Kingdom
Italy
Korea
Thailand
Spain
Australia
Philippines
India
Indonesia
average coupon
current 10 yr yield
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Note: Obtained using DDIS on Bloomberg.
Sources: Bloomberg, Standard Chartered Research
01 July 2013
46
Asia leverage uncovered
Macro-prudential policy measures
Policies in Asia are being recognised as best practice
In many of the country sections that follow, we examine the importance and use of
macro-prudential policies to help counter the rise in debt. Most of these measures
are targeted at property markets or foreign inflows/outflows. Asia has been well
ahead of the game, now offering examples of best practice in this area to other
regions. The old „Washington Consensus‟ view of leaving markets unchecked is no
longer perceived as best practice. Instead, taking action to limit credit bubbles is
seen as vital to avoid or at least limit potential future disruptions.
We see room to tighten macroprudential policies further in
some countries
Some countries have room to tighten macro-prudential policies further. Even though
the Bank of Thailand (BoT) recently increased loan-to-value (LTV) ratios for
residential properties, this came with a higher risk weighting for lenders who provide
such loans. If leverage related to perceived speculative buying rises further, it will not
surprise us if the BoT lowers LTV ratios. Malaysia has increased the property gains
tax to 10% for those who sell within two years of buying; the rate is 5% if a property is
sold within two to five years.
Hong Kong‟s very conservative LTV and DSR policy has limited the average LTV to
below 60%. Hong Kong and Singapore have also been aggressive in boosting stamp
duties on property purchases, particularly for foreign buyers. So far, the main impact
of the measures has been a drop in transaction volumes.
Korea and the Philippines have acted aggressively to counter foreign exchange
appreciation. Korea has adopted three policies in this regard: limits on banks‟ forward
FX positions, a macro-prudential levy on banks‟ non-deposit foreign-currency
borrowing, and a withholding tax on foreign investors‟ Korean bond investments. The
Philippines has strong rules in place to monitor foreign investment flows and has
increased the capital charge for NDF positions and a prescribed cap on banks‟
NDF exposures.
Figure 1: Macro-prudential and capital flow management measures in selected
Asian countries
2010-13
Total measures
% share
47
57
LTV ratio
13
16
Other
15
18
Capital measures
6
7
Liquidity measures
3
4
Non-credit real-estate measures
9
11
Macro-prudential measures
Credit measures
Other
1
1
Capital flow measures
35
43
Limits on foreign exchange exposure and borrowing
11
13
Restrictions on foreign access
7
9
Taxation of non-resident holdings
2
2
Other inflow measures
3
4
Liberalisation of inflows
6
7
Liberalisation of outflows
6
7
Source: IMF REO 2013
01 July 2013
47
Asia leverage uncovered
The tables below summarise LTV rules (Figure 2) and the characteristics of credit bureaus (Figure 3) in Asian countries.
Figure 2: LTV rules in Asian countries
Country
Maximum LTV ratios
Risk weighting and other details
China
 1st home : 70%
 2nd home: 40%
 Maximum LTV before 2010: 80%
 Banks generally believe mortgage loans are low-risk assets, and
contend that they can tolerate a c.30% decline in property prices.
Hong Kong
 For property value < HKD 7mn: 70%
Maximum loan amount: HKD4.2m
 For property value between HKD 7-10mn: 60%
Maximum loan amount: HKD 5.0mn
 For property value >HKD 10mn: 50%
 For non-owner-occupied residential unit: 40%
 In Feb 2013, the HKMA directed all financial institutions to adopt
a minimum 15% risk weighting on all new mortgages.
 If applicant‟s income is derived mainly from outside HK, LTVs are
reduced by 10% if there are no outstanding mortgages, and by
20% if there are other outstanding mortgages.
 Average LTV was 54% as of April 2013.
India
 For loan amount < INR 3mn & LTV <= 75%:
risk-weighting (RW) is 50%
 For loan amount INR 3.0-7.5mn and LTV <=
75%:
RW is 75%
 For loan amount < INR 7.5mn & LTV > 75%:
RW is 100%
 For loan amount > INR 7.5mn: RW is 125%
 For commercial mortgage lending: RW is 100%
 Loans/exposures to intermediaries for on-lending will not be
eligible for inclusion under claims secured by residential property,
but will be treated as claims on corporates or claims included in
the regulatory retail portfolio, as the case may be.
Korea
 Maximum LTV: 60%
 Average LTV: 45% (nationwide) as of Q1-13
 Average LTV: 48% (Seoul) as of Q1-13
 Banks pool mortgages into categories and grade credit risk and
assign risk-weights accordingly.
 Under the standard rating system, regulator guides to 35% riskweighting for mortgages.
 For IRB ratings, the regulator does not set a minimum regulatory
risk-weight for mortgages.
Singapore




 In addition to maximum LTVs, the government levies stamp duty
on buyers and sellers to dampen speculative transactions.
Malaysia
 70% maximum LTV for 3rd home only
 Current LTVs typically range from 70-90%.
 LTV was >100% a few years ago.
Thailand
 Bank LTVs are usually between 80-85%
 Banks may offer loans of up to 90% for
condominiums developed by existing customers
 Risk-weights for property value < THB 10mn:
1. Condominiums: 35% RW for LTV < 90%; 75% RW for LTV >
90%
2. Standalone houses: 35% RW for LTV < 95%; 75% RW for
LTV > 95%
 Risk weights for property value > THB 10mn: 35% RW for LTV <
80%; 75% RW for LTV > 80%
Indonesia
 Maximum LTV: 70%
 LTV was introduced in mid-2012
 Banks generally see risk of a property bubble as low. They
believe the LTV measure was introduced not as a response to
the current situation but rather as a prudent long-term policy.
1st home: 80%
2nd home: 50%
3rd and subsequent homes: 40%
Non-individual buyers: 20%
Sources: Central banks, Standard Chartered Research
01 July 2013
48
Country
China
Hong Kong
Background and development




No standalone credit bureau.
PBoC gathers credit-related information nationwide.
In early 2004, PBoC established the Personal Credit

Information Centre (PCIC) in Shanghai.

There are a number of privately owned credit
reference agencies (CRAs).
The HKMA supports the development of a fullfledged CRA but participation is not mandatory, as it
thinks this should be left to the market.
In 2004, a commercial credit reference agency was
launched to collate the credit history of SMEs. It is
run by Dun & Bradstreet, the service provider
appointed by the industry associations.


India


Korea
Information scope









India has a number of credit bureaus; Credit
Information Bureau (India) Limited (CIBIL), founded
in 2000, is the most important.
RBI mandates that banks check with a credit bureau

when they receive a loan application and have a
compliance officer for bureau data purposes.

Two nationwide credit bureaus: Korea Credit
Bureau (KCB) and NICE Credit Information Service.
KCB was launched in 2005 after the credit card
boom and bust. Banks, credit card issuers and nonbank financials are major shareholders.
NICE is owned by NICE Holding, whose major
shareholders are individual equity investors.


Effectiveness assessment
The PCIC gathers both positive and negative creditrelated information, including individual's credit
repayment history, tax records and daily utility bills.
As of end-2012, the PCIC had gathered credit
information on more than 800mn individuals.

Data relating to account defaults
Credit application data (within the last 90 days),
including the type and amount
Credit card loss data relating to losses arising from
the use of lost credit cards
Data gathered by the CCRA covers only the credit
data of SMEs, including the total number of credit
facilities obtained, limits and default amounts.
Information about company assets or the personal
wealth of the owners is excluded.

Due to concerns among some large banks that
their market knowledge and customer information
might be exploited by competitors, the
effectiveness of the CRAs has been limited due to
a lack of full participation by authorised institutions.
CIBIL‟s database consists of close to 135mn
individuals, 230mn loan records and 800
participating member institutions (Banks, NBFCs,
HFCs, etc.).
Data is submitted to CIBIL by banks and other
lenders on a monthly basis.
It has both positive and negative data, i.e. both
defaulters‟ and non-defaulters' data and data where
only enquiries have been made.

CIBIL has been effective thanks to its
comprehensive database and widespread
participation.
The hit rate (matching of application to the
database) of banks in India has improved
significantly to 75% today from 30% in 2005.
This generates a credit score for each individual,
which helps banks to assess the credit risk of
loans.
Both credit bureaus provide information on virtually
all borrowers (individuals and corporates).
Data gathered is both positive and negative,
including salary, job, credit history, etc.






The PCIC is effective given its comprehensive
database, in our view.
Banks have used the PBoC's credit database a
mandatory precondition for risk underwriting.
Members of the bureaus (mostly financial
companies) share client information via the
bureaus.
Credit card companies attribute their improved
asset quality to the credit bureaus.
Credit bureaus have been effective, in our view.
Sources: Credit bureaus and central banks websites, Standard Chartered Research
Asia leverage uncovered
01 July 2013
Figure 3: Credit bureaus in Asia
49
Country
Singapore
Background and development




Data related to loan payment performance
Credit health of customers
SME risk ratings
Bankruptcy and litigation information



Founded in 1982.
Participation is mandatory so all licensed
commercial banks, Islamic banks, investment banks
and other financial institutions participate.

Data gathered is both positive and negative,
including customer profiles and credit history.
The bureau generates credit risk reports and
business information reports, etc., for members.

The bureau is still in the development stage
relative to credit agencies in the US, Hong Kong
and even India. We think it is more effective than
Thailand‟s bureau, as it provides individual
customer reports that the banks can use to assess
applications.

Two credit agencies were founded in 2000 and
merged into the current bureau in 2005.
There are 78 members, including all commercial
banks, all state-owned financial institutions (except
Bank of Agriculture), and finance companies. All
members are required to submit data without
borrowers‟ consent, but data requests need
borrower consent.

Data gathered is both positive and negative, but is
related only to financial loans.

The bureau is still relatively new. However, it has
become increasingly proactive in pointing out
issues and engaging bank participation. It is
benchmarking itself against mature regional peers
and strives to move to higher stages of
assessment (including scorecards, consumer
reports, and non-financial data).
The Credit Information Bureau was created in 2006
by Bank Indonesia.
There are plans to create a private credit bureau.

The current bureau provides profiles only of debtors
who have already received credit.
The proposed new private credit bureau will provide
more comprehensive information on all debtor
profiles, both those who have received and not yet
received credit from all financing agencies, both
banking and non-banking.

The usefulness of the current credit bureau has
been limited by low coverage and ineffective data
collection, in our view. Its data related to credit card
loans is more comprehensive but data on
mortgages and other personal loans is insufficient.

Thailand

Indonesia
Effectiveness assessment
Set up in 2002, Credit Bureau (Singapore) is a joint
venture between the Association of Banks in
Singapore and Infocredit Holdings.
The Monetary Authority of Singapore provides
regulatory guidance.
28 retail banks and major financial institutions
participate and use its services.


Malaysia
Information scope





The bureau has full industry data from 28 banks
and financial institutions.
In our view, the bureau has effectively helped
members manage credit risk. However, because it
is relatively new, it is difficult to judge how it will
perform through future cycles.
Sources: Credit bureaus and central banks websites, Standard Chartered Research
Asia leverage uncovered
01 July 2013
Figure 3: Credit bureaus in Asia (continued)
50
Asia leverage uncovered
Australia
Chidambarathanu Narayanan, +852 3983 8568
Chidambarathanu.Narayanan@sc.com
How much is too much?
We place Australia in the „moderate risk‟ category in terms of overall leverage. As the
economy rebalances structurally and the focus turns to domestic consumption and
non-resource-led growth, Australia‟s Achilles‟ heel is in the household sector. The
country‟s total debt level is low overall compared to other major economies, but the
high level and concentration of debt among households is an area of vulnerability.
The Reserve Bank of Australia (RBA) has reduced the policy cash rate by 200bps
since November 2011 to a low of 2.75%. Easy credit, a booming housing market and
a push for greater consumer consumption can be a risky combination if households
leverage up excessively. In Australia‟s case, though, domestic conditions have led to
softer demand for debt from businesses and households as they consolidate
following high levels of debt earlier. Recent data indicates that households are
moving in the right direction, taking advantage of current low interest rates to repay
their existing debt and deleverage. Further deleveraging from high levels is needed
to ensure adequate debt repayment capacity as interest rise in the future, in our view.
Household leverage
Households are becoming more
prudent after years of excess
borrowing
Household leverage has increased consistently since the 1990s; nominal debt has
grown at an average rate of 7% every year for the past 25 years. Debt rose to more
than 110% of GDP in June 2010 and remains elevated. Recent credit growth data,
however, indicates that households have become more prudent – household credit
growth in the past five years has been less than half the pace of the past two
decades. Personal credit has declined in the past three years, and despite rising
housing prices, housing credit growth has also remained moderate, at an annual rate
of only 4.5%. The combination of slowing credit growth and higher wages amid the
mining boom has led to a fall in the household debt-to-income ratio, although it
remains high at close to 150%.
Households have recently taken advantage of low interest rates to pre-pay or
refinance their mortgages. The RBA estimates that the increase in the rate of prepayment subtracted 0.5ppt from housing credit growth in 2012. In addition, savings
appear to have stabilised at 10% of disposable income, higher than the average of
the past 20 years. This follows a steady decline since the mid-1980s to below zero
at the turn of the century.
Figure 1: Summary of leverage and credit growth
Figure 2: Debt distribution
Debt/GDP, %
Australia
Total
credit/GDP
Economy
208%
Debt service
ratio
250%
200%
150%
Private corporate sector
71%
Household sector
109%
Government
27%
Corporates
100%
14%
8%
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
Government
50%
Households
0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Sources: BIS, IMF, Standard Chartered Research
51
Asia leverage uncovered
Challenges beyond the high
household debt burden include a
weak job market and the peak of the
mining boom
While signs are encouraging, household debt remains above 100% of GDP, higher
than several other developed nations, with a bigger interest burden. Recent
weakness in the job market, slowing wage growth, and the approaching peak of the
mining boom present challenges. The build-up of mortgage buffers due to prepayments should enable households to weather any further deterioration in the job
market in the short term. Household mortgage buffers are estimated to be equivalent
to 14% of outstanding housing loans – around 20 months of household debt servicing
at current interest rates. This should significantly reduce risk when interest rates start
to rise in 2014-15.
Household debt/assets ratios have improved amid the housing-sector recovery, with
average dwelling prices up 4% since mid-2012. This is a positive sign that the realestate boom has not encouraged households to leverage up further. In addition, nonperforming loans remain low and lending standards have improved since the global
financial crisis. Following the RBA‟s rate cut in May, banks reduced their lending
rates by close to 25bps, transmitting almost the entire cut to consumers. Households
will have to maintain their prudent behaviour to reduce their debt to more sustainable
levels, even amid a possible further reduction in mortgage interest rates as the RBA
maintains its dovish bias.
Corporate leverage
Business credit has remained weak, particularly in non-mining sectors, as firms
remain cautious towards significant expansion. Near-term capital expenditure plans
are downbeat, though estimates for the next year are more optimistic. While this may
point to a slower-than expected domestic economic recovery, it is encouraging from
a risk standpoint, indicating that firms have refrained from borrowing despite easy
money conditions. Corporate debt fell to 70% of GDP in 2012 from over 80% in late
2008. However, we see a risk that demand for credit will rise as business sentiment
improves. The domestic economy has shown mixed signs of a pick-up, slowly
responding to 200bps of RBA rate cuts since November 2011. The onus is on banks
to continue lending, but prudently – even when businesses turn more optimistic and
investment sentiment improves.
Figure 3: Household savings are at a two-decade high
Figure 4: Private-sector credit growth has slowed
Savings/disposable income (LHS), debt/assets (RHS)
% y/y
15%
35%
10%
25
Housing
debt/housing
assets (RHS)
Household
saving ratio
30
30%
20
25%
5%
20%
15
10
5
0%
15%
-5%
10%
1991
1994
1997
2000
2003
2006
2009
2012
Sources: ABS, Standard Chartered Research
01 July 2013
0
-5
1988
1991
1994
1997
2000
2003
2006
2009
2012
Sources: ABS, Standard Chartered Research
52
Asia leverage uncovered
China
Stephen Green, +852 3983 8556
Stephen.Green@sc.com
Wei Li, +86 21 6168 5017
Li.Wei@sc.com
The growth recovery has faded
despite stronger credit growth,
leading to debate about the causes
High corporate leverage, low household leverage
Within Asia, we are most concerned about China‟s leverage; most of the risks lie in
the corporate sector. China‟s total leverage is still rising. We estimate that it
increased to 214% of GDP at the end of Q3-2012 from 201% a year earlier (see
Figure 2). Corporate balance sheets have been the main driver of this increase in
recent months, but it also reflects the rising debt of local government investment
vehicles (LGIVs) which are quasi-public in nature. The increase in 2012 followed a
significant ramp-up of leverage under China‟s CNY 4tn stimulus package. For much
of the 2000s, total leverage was only about 160-170% of GDP. This 50+ppt increase
in a relatively short period has raised concerns over the quality of credit allocation
and the efficiency of economic growth.
The latest acceleration in credit growth is the result of a policy shift that took place in
Q2-2012, when Beijing moved to loosen monetary policy after inflation had been
brought under control. Stimulus and tightening in China are not generally run through
the central government budget, but through administrative guidance and rule
changes that affect the availability of credit. The 2012 „mini-me‟ stimulus resulted in a
re-acceleration of credit growth starting in Q3-2012, from 15% to around 22% by
Q2-2013 (see On the Ground, 28 May 2012, ‘China – The 2012-13 ‘mini-me’
stimulus’). This credit expansion generated renewed moderate GDP growth
momentum in Q4-2012, but this momentum faded in Q1 for reasons that are still
being debated.
Increasing leverage carries risks. Many financial crises are foreshadowed by a rampup in leverage. Even a mild deterioration in credit quality could be severely damaging
to China. We have long warned of the problems associated with LGIVs (Special
Report, 18 July 2011, ‘China – Solving the local government debt problem’); more on
this subject below.
Leverage is also growing rapidly in „shadow banking‟, a huge and complicated new
sector of the financial system. The term „shadow banking‟ refers to bank-like activities
(deposit-taking, extending loans) carried out by institutions that are not regulated like
banks. Trust companies are the core of the system, but entrustment lending (intercorporate lending) is also included.
Figure 1: Summary of leverage and credit growth
Figure 2: Debt distribution
Debt/GDP, %
Total
credit/GDP
China
Debt service
ratio
250%
200%
Economy
214%
Government
150%
Private corporate sector
117%
73%
100%
Corporates
Household sector
20%
5%
Government
78%
6%
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
50%
0%
2000
Households
2002
2004
2006
2008
2010
2012
Sources: BIS, IMF, Standard Chartered Research
53
Asia leverage uncovered
At its core, shadow banking in China resembles formal banking in China more closely
than shadow banking in the US. In the US, shadow banks are made up of a wide
variety of institutions, including hedge funds, special investment vehicles and moneymarket funds. Such institutions will often use leverage and deal in securitised assets.
China‟s shadow banking sector has little leverage, there is very limited securitisation
of the underlying assets, and the maturity mismatches that trust companies and
others manage are the same as those the banks deal with. The key differences
between shadow banks and banks are:
1.
2.
A lack of interest rate controls: Shadow banks do not have to abide by the
rate restrictions banks are subject to; this incentivises banks to issue wealth
management products (WMPs), which also fall outside the scope of deposit rate
controls.
Where the funds are going: We suspect that most funds from the shadow
banking sector are going into sectors where banks are now restricted, such as
real estate and infrastructure.
We believe there is a wide divergence in the quality of institutions involved in shadow
banking activities. Some of the national trust companies are well run and take
possession of collateral even before lending, while some smaller trusts behave with
less care. Much of the inter-corporate borrowing in the shadow banking system, often
via entrustment loans, is between companies that know each other well; some of it is
not. Some sectors receiving shadow funds are currently recovering, such as real
estate (although the sector‟s health varies widely by location), while others, such as
LGIVs, face significant long-term repayment challenges. Given the lack of detailed
information available, it is difficult to form a judgement on how large the credit risk is.
It is possible that some of the new credit growth in the shadow banking system is
being used to plaster over non-performing credits (with interest being added to
principal). It is impossible to calculate how much of this „evergreening‟ of bad loans is
going on, and how much unpaid interest is being „paid‟ via new loans.
Below, we provide a detailed look at how leverage is distributed across China‟s
household, corporate and government sectors. We show our estimate of this
breakdown in Figure 3.
Figure 3: Leverage began to rise again in 2012
Credit, using total social financing data, % of GDP
250%
200%
Entrusted loans
Policy banks
Government bonds
Trust loans
FCY loans
AMC Bonds
LGIVs
Corporate bonds (ex. LGIVs)
Bank acceptances
RMB loans (ex. LGIVs)
150%
100%
50%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sources: CEIC, Standard Chartered Research
01 July 2013
54
Asia leverage uncovered
Corporate leverage
Corporates account for the largest
share of leverage
The corporate sector makes up the bulk of China‟s leverage – some 117% of GDP as
of end-2012, we estimate. This figure excludes our estimates of LGIV debt. The
growth of corporate leverage has been facilitated by growth in the non-bank financial
sector, including channels such as trust and entrustment loans and trade finance bills
(bankers‟ accepted drafts, or BADs).
Household leverage
Household leverage is low, and has
room to grow
China‟s household leverage is low relative to other economies. We estimate that
loans outstanding to consumers were about 20% of GDP at end-2012, essentially flat
since 2010. Total loans outstanding to the household sector are officially 30% of
GDP, but this figure includes loans to small family businesses, which we include in
corporate credit for the purposes of this analysis. Overall, the household sector has
room to increase its level of leverage.
Government leverage
Government leverage is getting
close to a dangerous level, in our
view
On the government side of the balance sheet, we welcome the more realistic
estimates of public debt now circulating in quasi-official circles. The Ministry of
Finance (MoF) continues to target a relatively tight budget deficit, aiming for 2% of
GDP in 2013; this has kept outstanding MoF debt low (On the Ground, 15 January
2013, ‘China – Mr. Li’s 2013 pocket money’). However, it is now more commonly
accepted that total government debt includes not just outstanding bonds of the MoF
(just under CNY 7.8tn, or 16% of GDP, at end-2012), but also debt issued by the
policy banks (mostly China Development Bank, a total of nearly CNY 8tn, or 16% of
GDP) and by the Ministry of Railways (c.CNY 3tn), plus local government debt. The
quasi-official estimate we often now hear is 50% of GDP; the IMF has released the
same estimate of China‟s „augmented debt‟. Our estimate for end-2012 is 78%. Much
of the difference is down to our guesstimate of the scale of LGIV debt.
The various reported numbers on LGIV debt are difficult to understand. The bank
regulator released an estimate of CNY 9.3tn for LGIV loans at end-2012. (This number
appears to include all LGIV debt, including debt held by restructured LGIV entities
whose loans are now classified as normal corporate loans.) To this, we need to add
CNY 2tn in LGIV bonds, as well as a small amount of local government debt. So far,
so good. But this number does not include IOUs by local governments to companies
building infrastructure on contract, about which we have zero data. We guesstimate
that outstanding LGIV debt is now in the range of CNY 14-15tn, some 30% of GDP –
roughly double outstanding MoF debt, and considerably less transparent.
We hold out hope that the new
leadership team will adopt reforms
to slow overall credit growth, and
push through productivityenhancing measures
We believe that the need to expand the economy without adding leverage is
becoming clear to Beijing. Growth needs to be achieved through real structural
reforms that lift productivity rather than by adding leverage – otherwise, China may
have a date with a financial crisis. The new government appears to be introducing
measures to down the expansion of credit. These include:

01 July 2013
Measures to make it harder for LGIVs to raise external funds. Banks have been
told that they cannot increase net outstanding loans to LGIVs. The requirements
for bond issuance have been raised. Additional measures have made it harder
for non-commercial LGIVs to borrow from trust companies. The authorities have
also required local governments to sell land, rather than insert it directly into
LGIVs. Although implementation will be varied, these measures are probably
55
Asia leverage uncovered
resulting in cash-flow challenges for many LGIVs, and may help to explain the
lack of a clear recovery in infrastructure activity in H1-2013.

Measures to slow the rate of WMP issuance. WMPs are a key fund-raising
channel for trust companies and others. Rules introduced in late March require
that a maximum of 35% of WMP-raised funds may be invested in non-publicly
traded assets. Real-estate loans, trust loans and BADs are all examples of nonpublicly traded assets currently commonly found in WMP asset pools. Although
the rules will be implemented only over time, they should slow the rate of nonbank credit growth, and result in lower WMP interest rates.
Ultimately, though, China cannot deleverage without productivity-enhancing reforms.
The Li government will be judged on this basis – whether it can deliver a meaningful
programme of reforms over the 2014-16 period.
01 July 2013
56
Asia leverage uncovered
Hong Kong
Kelvin Lau, +852 3983 8565
Kelvin.KH.Lau@sc.com
Risks from higher global rates
Hong Kong falls into our middle category, with moderate overall risk from leverage.
The government has plenty of cash (and minimal public debt), but no monetary policy
autonomy to manage credit cycles. The authorities are therefore constantly on the
lookout for signs of bubbles, and are avid users of macro-prudential measures as
counter-cyclical tools. It is against this backdrop that one should view Hong Kong„s
high credit level of 268% of GDP, based on BIS data. This is comparable to
Singapore, also a small, highly open economy with a large financial sector; Hong
Kong has a less leveraged household sector. We take comfort from the fact that
Hong Kong banks are well managed and regulated. This is illustrated by their
resilience to the latest global financial crisis and their consolidated capital adequacy
ratio of around 16%, well above the minimum international standard of 8%. There are
few signs of credit over-extension, judging from the benign loan-to-deposit ratio of
less than 70%.
Hong Kong is vulnerable to high US
rates and slower growth in
mainland China
However, the rapid pace of property-related credit expansion and rising China-related
exposures (if one also includes banks‟ external claims) in recent years are potential
sources of vulnerability. Both require preparation for the inevitable – an eventual rise
in interest rates that is bound to hit mortgage owners, and spillover from increasing
integration with China as the mainland goes through its own business cycles. Macroprudential measures and constant vigilance are therefore required. So far, Hong
Kong has not disappointed on this front.
Taming the property beast
Property-related lending – including personal mortgages, loans for building and
construction, and loans to property developers and investors – account for over half
of total domestic bank loans outstanding, and have historically been key contributors
to rapid credit growth (Figure 3). The dampening effect on credit growth of the 200708 global financial crisis proved transitory as the property sector continued to benefit
from ultra-accommodative liquidity conditions, resilient domestic demand, active
participation by mainland investors, and a supply shortage of residential units.
However, we believe the latest slowdown in property credit growth (since 2012) will
be more sustainable as a series of property market-cooling measures by the
government and the Hong Kong Monetary Authority (HKMA) yield the desired results.
We believe property-related leverage is manageable for now.
Figure 1: Summary of leverage and credit growth
Figure 2: Debt distribution
Debt/GDP, %
Hong Kong SAR
Total
credit/GDP
Debt service
ratio
Economy
268%
Private corporate sector
127%
76%
Household sector
60%
8%
Government
32%
300%
250%
Government
200%
150%
Corporates
100%
50%
Households
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: BIS, IMF, Standard Chartered Research
57
Asia leverage uncovered
As Figure 4 shows, household affordability of residential properties is not too
alarming at present, mainly thanks to record-low interest rates. When interest rates
start to rise sustainably, in 2014 or 2015, affordability will deteriorate in tandem, but
from better levels relative to the period before the Asian financial crisis.
Strong macro-prudential measures
will provide a cushion against
higher US rates
More importantly, macro-prudential measures have prepared households and banks
for higher interest rates to come. The authorities‟ proactive approach, discouraging or
even penalising multiple homeownership and property flipping, has reduced new
mortgage approvals (albeit with the short-term side effect of keeping home prices
elevated as the higher cost of re-investing also deters potential sellers). Mortgages
that are still being extended are at near record-low loan-to-value ratios – 53.5% as of
April 2013, down from 60%+ prior to mid-2010. As an additional buffer, banks now
approve mortgages based on the borrower‟s debt servicing ability under a stressed
assumption of interest rates rising by 300bps. Speculators are being largely weeded
out by stamp duty hikes, limiting the risk of a downside overshoot when a correction
happens.
We expect the authorities to continue their proactive use of macro-prudential
measures to limit speculation and leverage, while buying the government more time
for new supply to come through. Increased supply should naturally support lending to
property developers, translating into high-quality leverage.
Figure 3: Property-related lending is a key contributor
Figure 4: Affordability is manageable, but set to worsen
Contribution to y/y growth in domestic bank loans
Bracing for higher interest rates by borrowing less, %
40%
Personal Mortgage
Wholesale and retail
Other property-related
Others
30%
120
20%
80
10%
60
0%
40
-10%
20
-20%
1996
1998
2000
2002
2004
2006
2008
2010
95
100
Total
1994
100
2012
Affordability ratio (if mortgage
rate goes up by 300bps)
80
75
70
65
60
New mortage average
LTV ratio (RHS)
55
0
50
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Sources: CEIC, Standard Chartered Research
Figure 5: Rising China exposure
Figure 6: The biggest offshore Renminbi centre
Banking sector’s non-bank China exposures, HK bn
Net external liabilities and claims on China, HKD bn
4,000
2,000
2,500
85
Affordability ratio
(mortgage pmt as %
of household income)
Sources: CEIC, Standard Chartered Research
3,000
90
Net liabilities
Non-bank
0
-2,000
2,000
-4,000
1,500
-6,000
-8,000
1,000
-10,000
Bank
-12,000
500
-14,000
0
2006
2007
2008
2009
2010
2011
2012
Sources: CEIC, Standard Chartered Research
01 July 2013
Net claims
-16,000
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Sources: CEIC, Standard Chartered Research
58
Asia leverage uncovered
Riding the rising dragon
Hong Kong has seen an explosion in foreign-currency trade financing, spurred by
Renminbi trade settlement since its 2009 launch. Financing backed by genuine trade
does not worry us, but it does reflect a paradigm shift induced by the expansion of
the offshore Renminbi (CNH) market. Externally, banks are taking on more non-bank
China exposures (Figure 5), a good indication of the irreversible trend of Hong KongChina financial integration. Hong Kong banks‟ net external position shows that their
exposure to non-banks in China is much healthier (Figure 6). Bank exposures to
Chinese banks have risen more dramatically; this is partly a by-product of the need to
deploy surplus CNH liquidity, but also a result of the onshore/offshore interest rate
differential. The HKMA is closely monitoring banks‟ exposures to mainland entities.
The challenge is to strike a balance between managing banks‟ cross-border risk and
supporting further CNH market development.
01 July 2013
59
Asia leverage uncovered
India
Anubhuti Sahay, +91 22 6115 8840
Anubhuti.Sahay@sc.com
Risk profile of debt has increased
We place India in the „moderate risk‟ category for overall leverage-related risk at the
macro level. However, we are concerned about growing leverage in the
corporate sector.
Even as debt accumulation has
slowed in the post-crisis period,
risks have increased
India‟s debt-to-GDP ratio hardly rose from FY08-FY13, ending the period at 138%;
this followed a sharp 15ppt increase during the FY02-FY08 period. However, the risk
profile of this debt has weakened in the past two years for several reasons:
1. Debt extended previously on optimistic assumptions of sustained strong GDP
growth has come under stress as growth has slowed to a decade-low. Prospects
for a strong revival in GDP growth are limited given continued policy inertia on
investment approvals. This may pose eventual risks to the debt servicing
capacity of some segments of the economy.
2. Debt raised in the past two years has not been accompanied by an increase in
capital formation, raising concerns about future debt repayment capacity.
3. The corporate sector is increasingly dependent on external sources for debt
funding. Given the record current account deficit (5.2% of GDP in FY13) and
volatile capital flows, this increases the economy‟s external vulnerability.
4. S&P still has a negative outlook on India‟s sovereign rating of BBB-. A downgrade,
which could be triggered by another deviation from the fiscal consolidation plan or
a continued slowdown in GDP growth, would push India into the junk category.
This could have severe repercussions for the economy as a whole.
Recent measures to contain the
fiscal deficit and reduce the interest
burden are encouraging, but a
growth revival is needed for a
sustainable reduction of debt ratios
The government has taken steps in the past nine months to improve the situation.
Efforts to pursue fiscal consolidation by reducing the subsidy burden in a tough political
environment are commendable. Measures to narrow the current account deficit
(restrictions on gold imports) and to attract more capital inflows (relaxed investment
norms for foreign investors) have eased concerns about funding the current account
deficit. The recent softening of domestic and global price pressures, along with reduced
policy rates, should provide significant relief. The Reserve Bank of India (RBI) has
reduced the repo rate by 75bps since the beginning of 2013; The RBI has also
tightened macro-prudential measures to improve financial stability. Large FX reserves
of USD 290bn and a savings rate of 30% of GDP also provide comfort.
Figure 1: Summary of leverage and credit growth
Figure 2: Debt distribution; increase in corporate,
household debt offsets reduction in government debt
Debt/GDP, %
Total
credit/GDP
India
Economy
Debt service
ratio
160%
140%
120%
138%
Government
100%
Private corporate sector
55%
75%
80%
60%
Household sector
18%
5%
Corporates
40%
20%
Government
64%
20%
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
0%
1998
Households
2000
2002
2004
2006
2008
2010
2012
Sources: BIS, IMF, Standard Chartered Research
60
Asia leverage uncovered
However, concerns about current debt levels are unlikely to subside unless policy
bottlenecks (related to land acquisitions and environmental regulations) holding back
the investment cycle are resolved. Sluggish investment is at the core of the
slowdown in domestic demand. A clear strategy to jump-start the investment cycle
and strict adherence to a prudential fiscal consolidation plan are necessary to ensure
a sound macroeconomic environment and medium- to long-term debt sustainability.
Below, we take a detailed look at how leverage is distributed across India‟s
household, corporate and government sectors.
Government sector
While Fitch‟s recent upgrade of India‟s sovereign rating outlook to stable from negative
has reduced fears of an imminent downgrade, government debt needs to be monitored.
Government needs to stay on the
fiscal consolidation path to bring
debt down to sustainable levels
The government is still the largest borrower in the economy, with debt at 64% of
GDP. This needs to be reduced further. Fiscal consolidation measures implemented
since mid-FY13 need to be adhered to closely. While government debt fell by 11ppt
between FY08 and FY13 to 64% of GDP, this was driven by higher nominal GDP
growth, as fiscal policy was loose. The fiscal deficit jumped to 8.5% of GDP in FY12
from 5.5% in FY07.
Recent cuts in fuel subsidies are welcome, but the government will need to continue
with monthly fuel price revisions even when energy prices rise and the 2014 general
election nears.
India also needs to strike the right balance between the quality of fiscal consolidation
and growth. The government‟s repeated pledges to reduce the FY14 fiscal deficit to
below the 4.8%-of-GDP target should bring the general government deficit towards
7% of GDP and general government debt level lower. However, investment-related
expenditure usually bears the brunt of such fiscal consolidation as it is reduced to
accommodate recurrent expenditures like subsidies and interest payments. With
almost 80% of total expenditure committed to recurrent items including interest
payments, subsides and salaries, India lacks the ability to run counter-cyclical fiscal
policies. This strategy of slashing capital expenditure to accommodate recurrent
expenditure should be avoided, as GDP growth has already slowed to a decade low.
Figure 3: Increasing debt has not led to asset creation
% of GDP
60%
Corporate
debt
50%
40%
Gross fixed
capital
formation of
public and
private sector*
30%
20%
Figure 4: Corporates rely on banks and overseas sources
for borrowings (% of GDP)
60%
Bank credit
Overseas
Others
50%
40%
30%
20%
10%
10%
0%
0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
* Excludes household debt; Sources: CEIC,
Standard Chartered Research
01 July 2013
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Sources: CEIC, Standard Chartered Research
61
Asia leverage uncovered
Revival of GDP growth is necessary
for fiscal consolidation
Potential contingent liabilities also pose risks. For instance, stress in the agriculture
sector and at State Electricity Boards and the need to recapitalise India‟s banks may
add to government debt. The fiscal health of India‟s 28 states also varies widely.
Some are struggling with high levels of debt and low growth. While a default is
unlikely (no Indian state has ever defaulted), the states‟ debt burden will ultimately be
borne by the central government, and private corporates with direct exposures to
such debt will have to bear the losses in the interim.
A downgrade of India’s sovereign
rating outlook would pose fresh
challenges to the corporate sector
S&P still has a negative outlook on India‟s sovereign rating. If GDP growth is not
revived, India risks falling into a cycle of low growth and high debt. Regulations such
as the Statutory Liquidity Ratio (SLR), which requires the banking system to invest
23% of its net demand and time liabilities (NDTLs) in government securities, provide
an assured source of funding for government debt. Almost 98% of government debt
is funded domestically. Thus, while a rating downgrade would not affect the funding
of government debt, it would become more expensive. The corporate sector could
suffer more as raising debt became both challenging and expensive.
Corporate sector
Corporates are India‟s second most highly leveraged sector after the government; we
estimate that corporate debt rose to 55.5% of GDP in FY13 from 32% in FY04.
During the period preceding the global financial crisis, optimism about growth, easy
availability of bank credit and overseas borrowings fuelled this increase. The pace of
debt accumulation slowed in the post-crisis period – the debt-to-GDP ratio increased
by 12ppt during the FY08-FY13 period, compared with a 17ppt gain during the FY02FY08 period.
The unexpected slowdown in GDP
growth amid high inflation and
interest rates has increased stress
around corporate debt
However, risks around these debt levels have risen, as the increase in corporate
debt/GDP in the post-crisis period has not been accompanied by an increase in
capital formation (see Figure 3). Also, the corporate sector‟s credit profile has
weakened in the past two years on rising cost pressures, companies‟ inability to pass
on higher costs, high interest rates, FX losses, constrained access to equity on
lacklustre markets and, most importantly, slowing demand. The interest coverage
ratio of 399 non-financial companies in the BSE 500 index has increased.
Infrastructure sectors such as power and telecom were the most vulnerable on high
leverage ratios, delays or cancellations of regulatory approvals, a lack of assured fuel
Figure 5: Increased reliance on external debt
% of GDP
External
160%
Domestic
Figure 6: Further progress on fiscal consolidation is
needed (fiscal deficit, % of GDP)
10
140%
8
120%
100%
6
80%
4
60%
40%
2
20%
0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Sources: CEIC, Standard Chartered Research
01 July 2013
0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Sources: CEIC, Standard Chartered Research
62
Asia leverage uncovered
supply and delayed payments from government-owned entities. Several companies
defaulted in FY13 due to increased debt burdens and an unfavourable
macroeconomic environment. While such defaults did not cause systemic risk, they
highlighted the reduced capacity of the corporate sector to absorb shocks and the
simultaneous increase in the banking sector‟s non-performing assets (NPA) burden.
Gross NPAs in the banking system
may increase, as the risk of
restructured loans slipping into the
NPA category is high
Gross NPAs rose to 3.5% of total bank loans in December 2012 from 2.8% in March
2012 (Figure 7). The manufacturing, construction and power sectors had significantly
above-average NPAs, as they were particularly affected by the lack of policy clarity
(see Figure 8). Restructured loans (particularly big-ticket loans) have risen sharply in
these sectors. The proportion of restructured standard advances to gross total
advances increased to 5.9% at end-September 2012 from 3.5% in March 2011.
Some of these restructured loans may slip into the NPA category, and further
requests from corporates for loan restructuring cannot be ruled out.
Lower interest rates, falling cost pressures and a marginal improvement in economic
growth in FY14 should provide some relief, though recent FX losses are likely to
mitigate the positive impact. We do not expect a marked improvement in credit
quality. In fact, most of the credit rating agencies expect the number of corporate
Figure 7: NPAs and corporate debt restructuring rise
Figure 8: NPAs in various sectors
% of bank advances
% of total advances
4.0
2,300
Restrutured
advances to
gross total
advances,
INR bn (RHS)
3.5
Infrastructure
2.5
Cement
1,800
Engineering
3.0
NPAs, %
Automobiles
1,300
Construction
Iron & steel
Agriculture
2.0
800
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12
0
Sources: CEIC, Standard Chartered Research
1
2
3
4
5
6
Sources: CEIC, Standard Chartered Research
Figure 9: Companies’ interest burden has increased
Figure 10: Telecom, industrials, energy hit the hardest
Non-financial companies’ interest expense to operating
income (BSE 500 index)
Non- financial companies’ interest expense to operating
income (BSE 500 index)
30%
80%
70%
25%
60%
20%
50%
40%
15%
FY12
30%
10%
FY07
20%
10%
5%
0%
0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Sources: Bloomberg, Standard Chartered Research
01 July 2013
Energy
Industrials
Materials
Telcom
services
Utilities
Note: Industrial includes capital goods, transportation and
professional services; Sources: CEIC, Standard Chartered Research
63
Asia leverage uncovered
downgrades to continue to exceed upgrades in FY14. Local rating agencies still
expect defaults for some corporate. Even this bearish outlook for the corporate
sector‟s credit profile in FY14 assumes an improvement in the investment
environment by accelerating regulatory approvals and addressing pricing issues in
the energy sector.
Household sector
Household leverage is low relative
to other economies; tight macroprudential regulations and financial
savings could provide a buffer
against income shocks
India‟s household sector leverage, which we estimate at 18.5% of GDP as of March
2013, is low relative to other economies. While loans to the agriculture sector (almost
7.3% of FY13 GDP) and housing (4.7% of GDP) could face strain in case of an
income shock and/or a sharp fall in property prices, tight macro-prudential regulations
and high financial savings provide a buffer against this.
The tightening of macro-prudential norms – such as an increase in risk-weights to a
range of 50-125%, higher provisioning against standard housing assets, and a
maximum LTV ratio of 80% – have slowed the pace of debt accumulation since the
crisis. The domestic economic slowdown and concerns about banks‟ deteriorating
asset quality have also resulted in more prudent lending to the household sector.
While financial savings declined to 7.8% of GDP in FY12 (according to preliminary
estimates) from 12.2% in FY10, they will provide a buffer against income shocks.
Figure 11: Household debt is stable
Figure 12: Financial savings, though declining, still
provide a buffer
% of GDP
% of GDP
Personal loans
20%
Agri loans
Loans from other instituions
18%
13%
12%
16%
14%
11%
12%
10%
10%
8%
9%
6%
8%
4%
7%
2%
6%
0%
2006
2007
2008
2009
2010
2011
2012
2013
Sources: CEIC, Standard Chartered Research
01 July 2013
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: CEIC, Standard Chartered Research
64
Asia leverage uncovered
Indonesia
Eric Alexander Sugandi, +62 21 2555 0596
Eric.Alexander-Sugandi@sc.com
Indonesia’s leverage level is still
considered generally safe
Room to boost household consumption through leverage
While the total amount of leverage in Indonesia‟s economy continues to increase
(see Figure 2), we place Indonesia in the low-risk category and believe it has room
for more leverage. For each type of borrower, the ratio of leverage to GDP is still well
within safe thresholds. We are, however, closely watching the evolution of external
debt in the corporate sector.
The ratio of government debt to GDP has continued to fall, to 24.5% in 2012 from
80.2% in 2001, as the government expedited debt repayment after the 1997-98 crisis
(Figure 2). While the government budget deficit is capped by law at 3% of GDP, there
are no such restrictions on government debt. Nevertheless, we believe the
government will keep its debt-to-GDP ratio low.
We are more concerned about
corporate and household leverage
than government leverage
Corporate and household debt may pose bigger risks to the economy in the medium
to long term (i.e., beyond a one-year horizon), in our view. Corporate debt grew
almost fourfold from 2001-12. Household debt grew almost 13 times over the same
period, and may overtake government debt in the medium to long term.
Corporate leverage
As corporate external debt
increases, Indonesia becomes more
exposed to foreign-currency risk
The expansion of Indonesia‟s corporate sector amid robust economic growth has
driven the rapid increase in corporate debt. As long as Indonesia‟s economy
continues to grow strongly, we expect corporate debt to continue to rise. Corporate
debt grew at an average rate of 13.1% a year from 2001-11, far exceeding average
investment growth (7.6%).
We are more concerned about corporate external debt. Recalling the experience of
the 1997-98 crisis, some argue that rising corporate external debt has increased
Indonesia‟s exposure to risks arising from the global financial system. Some
lawmakers and academics have asked Bank Indonesia (BI) and the government to
impose measures to limit corporate external debt.
While we agree with the assessment that corporates‟ foreign-currency risk is rising,
we think it is unnecessary for the authorities to impose draconian limits on corporate
external borrowing (such as banning corporates from borrowing offshore), as such
Figure 1: Summary of leverage and credit growth
Figure 2: Debt distribution
Debt/GDP, %
Indonesia
Total
credit/GDP
Economy
58%
Private corporate sector
17%
Debt service
ratio
120%
100%
80%
31%
60%
40%
Household sector
17%
4%
Government
25%
6%
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
20%
Government
Corporates
Households
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: BIS, IMF, Standard Chartered Research
65
Asia leverage uncovered
measures would only hamper investment growth. Foreign investors might also
perceive such measures as capital controls by, which could negatively impact the
Indonesian rupiah (IDR). Instead, we believe BI or the government could impose
softer measures, such as maximum ratios for offshore borrowing (as a percentage of
total debt or total earnings), while giving corporates time to adjust to such measures.
Foreign and joint venture banks are
aggressive in onshore FX lending…
We are also concerned about aggressive FX onshore lending in the banking sector
by foreign banks and joint-venture (JV) banks. These banks‟ loan-to-deposit ratios
(LDRs) for third-party onshore FX are above 100%, indicating negative liquidity. This
means that most of these banks need to generate funds from third parties. It is
technically possible to have negative liquidity, provided that banks can finance their
long-term (L/T) lending with short-term (S/T) funding („gapping‟). S/T funding can be
obtained by generating S/T deposits or via S/T borrowing from other banks or BI.
Foreign banks (such as JV banks) can also receive funding from their head offices or
parent companies.
Figure 3: Household debt has grown the fastest
Debt by type of borrower (IDR tn)
5,000
Corporate
Government
Household
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sep2012
Sources: BIS, IMF, Standard Chartered Research
Figure 4: Foreign and JV banks are more aggressive in extending onshore FX
loans than in generating funds from third parties
Third-party FX loan-to-deposit ratios (LDRs)
160%
BPDs
140%
JV banks
Foreign banks
120%
100% threshold
100%
80%
State-owned banks
60%
Private banks with
FX operations
40%
20%
0%
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
Sources: Bank Indonesia, Standard Chartered Research
01 July 2013
66
Asia leverage uncovered
… exposing Indonesia’s banking
system to shocks from these banks’
parent companies
Despite these possible funding sources for foreign and JV banks, their aggressive
lending increases Indonesia‟s exposures to external shocks via the financial channel.
Increasing third-party foreigncurrency deposits would help to
meet domestic demand for foreigncurrency loans
We believe that BI should encourage domestic banks to increase their third-party
deposits denominated in foreign currencies and channel these funds to corporates.
We think there are two main factors behind corporates‟ decision to borrow offshore:
(1) supply of foreign-currency loans in Indonesia‟s banking system is insufficient to
meet corporate demand; and (2) onshore borrowing in foreign currencies is more
expensive than offshore borrowing (as a consequence of the first factor). A bigger
pool of foreign-currency third-party funds in the domestic banking system would
increase supply of foreign-currency loans and eventually bring down the cost of
borrowing foreign currency onshore.
Shocks in the home countries of foreign and JV banks may reduce the availability of
FX funding, tighten FX supply in Indonesia‟s banking system, and in turn negatively
affect investment growth.
Household leverage
Household debt has grown rapidly
Rapid growth in household debt is worth monitoring, in our view. Unlike corporate debt,
almost all of Indonesia‟s household debt is denominated in IDR, at it is used mostly for
domestic consumption. Most household loans extended by banks are used for vehicle
(automotive) and housing purchases, according to BI data (Figures 5 and 6).
Banks and non-bank financial institutions (NBFIs) have been aggressive in extending
loans for automotive purchases, and in many cases require only the purchased
vehicle as collateral for such loans. To minimise the risk of rising NPLs stemming
from aggressive expansion of consumer loans, BI imposed minimum down-payment
ratios for key categories of consumer loans in June 2012: 25% for motorcycle
purchases, 30% for car purchases and 30% for home purchases.
Consumer loans to middle class
has NPL risk since the middle class
is still dominated by lower-middle
income segment
As the middle class grows along with the economy, we expect household debt to
continue to rise in the short and medium term. However, Indonesia‟s middle class is
still dominated by lower-middle-income households, which are susceptible to falling
into the low-income category when major economic shocks occur. This poses NPL
risk to banks, in our view.
Figure 5: Vehicle purchase and housing loans dominate
banks loans to non-productive sectors
Figure 6: Most property loans are used to purchase
houses and apartments
Bank loans to non-productive sectors (IDR tn)
Bank loans to property sector, including property construction
(IDR tn)
900
400
Apartments
Shophouses
Vehicles
800
700
350
300
600
Houses
250
500
200
400
300
150
Other nonproductive
loans
200
100
50
100
0
Real estate
Property
construction
House and
apartment
(KPR and
KPA)
0
2010
2011
2012
Mar-13
Sources: Bank Indonesia (SEKI), Standard Chartered Research
01 July 2013
2010
2011
2012
Mar-13
Sources: Bank Indonesia (SEKI), Standard Chartered Research
67
Asia leverage uncovered
Lessons from the 1997-98 crisis
High corporate leverage was a
factor behind Indonesia’s 1997-98
crisis
High corporate leverage was a key factor behind Indonesia‟s 1997-98 crisis. The
build-up of high corporate leverage in the 1990s was inseparable from the increase in
FDI in Indonesia. In 1988, the government deregulated and liberalised the financial
system in order to attract more FDI. While this policy succeeded, helping to boost
GDP growth to 7.7% on average from 1989-96 (from just 4.8% during 1985-88, when
oil prices fell sharply), it also increased Indonesia‟s exposure to the international
financial system. As FDI inflows continued, the current account deficit widened due to
increased imports of capital goods and production inputs, as well as a negative
balance of services due to income repatriation by foreign investors.
Meanwhile, optimism on GDP growth prospects and the government‟s financialsector deregulation policies prompted domestic corporates to increase their leverage,
both in IDR and foreign currency. Many of these corporates also needed foreigncurrency financing to buy imported capital goods and production inputs, while their
earnings were in IDR. Much of the private sector‟s external debt was unhedged, as
private corporates assumed the IDR exchange rate would remain stable. Given its
small FX reserves (at only around USD 20bn at the peak of 1997 crisis), Indonesia
could not sustain a shock to its currency. Many corporates could not repay their
foreign-currency debt as the IDR depreciated sharply.
We believe Indonesia is not facing
leverage problem in the near future
Indonesia‟s economic fundamentals have strengthened considerably since the period
prior to the 1997-98 crisis. BI now has more FX reserves to defend the IDR (USD
107.3bn at end-April 2013), and Indonesia has adopted a managed float exchange
rate regime that does not require BI to defend the IDR at a specific level at all costs.
The banking system is also much better regulated, while corporate debt (albeit rising)
is well below 50% of GDP (Figure 7). Overall, we do not expect Indonesia‟s economy
to face leverage problems in the near future thanks to strong fundamentals and
prudential macroeconomic and banking policies.
Figure 7: Private-sector debt/GDP ratio is much lower than before the 1997
financial crisis
Private-sector debt (IDR tn) and its ratio to nominal GDP
Private-sector debt/
GDP (RHS)
3,000
Private-sector debt
(IDR tn)
2,500
90%
80%
70%
2,000
60%
50%
1,500
40%
1,000
30%
20%
500
10%
0
0%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Sep2012
Sources: BIS, IMF, Standard Chartered Research
01 July 2013
68
Asia leverage uncovered
Japan
Betty Rui Wang, +852 3983 8564
Betty-Rui.Wang@sc.com
Living on the edge
We see Japan‟s leverage as a source of concern, not just because of government
debt but also because of elevated levels of private-sector borrowing. Japan has the
world‟s highest public debt-to-GDP ratio. Public debt began to rise during the asset
price collapse of the early 1990s, following nearly 20 years of high growth in the 1970s
and 1980s. Repeated fiscal stimulus and depressed tax revenue during the Asian
financial crisis of the late 1990s, followed by the global financial crisis of 2008-09, led
to a widening fiscal deficit and a further expansion of public debt. Japan‟s gross
government debt-to-GDP ratio soared to about 240% in 2012 from 132% in 1999.
The story behind the numbers
Japan‟s rising public debt ratio reflects a combination of declining nominal GDP,
lower government revenue, increasing fiscal stimulus and automatic stabilisers. Low
economic growth has eroded government revenue, while fiscal stimulus has been
required to boost the economy; both have taken a toll on the country‟s fiscal position.
Demographic changes put further pressure on the country‟s fiscal health, as the
ageing population requires more social security spending. Social security spending,
the largest component of government expenditure, rose to 27.8% of total spending in
FY12 (year ended 31 March 2013) from 19.8% in FY01.
The large scale of local holders of
JGBs and Japan’s positive external
balance should prevent a sovereign
debt crisis for now
Still, ballooning public debt has not yet translated into an imminent threat to the
government‟s solvency, in our view. We do not see Japan‟s default risk as high; the
country has only defaulted once before, in 1942 (during wartime). In addition, Japan‟s
debt is largely local currency-denominated and domestic investors hold more than
90% of total outstanding Japanese Government Bonds (JGBs).
Japan‟s external surplus provides another cushion against skyrocketing public debt.
The country has maintained a current account surplus for more than two decades.
Despite disruptions to exports from the global economic slowdown and the March
2011 earthquake, the current account has remained in positive territory thanks to
stable income inflows. The financial account deficit has also narrowed more than
50% since 2008. As a result, the FX reserves tripled between 2001 and 2012, and
are equal to 10% of total government debt.
Figure 1: Summary of leverage and credit growth
Figure 2: Debt distribution
Debt/GDP, %
Total
credit/GDP
Japan
Debt service
ratio
450%
400%
350%
Economy
400%
300%
Government
250%
Private corporate sector
95%
Household sector
66%
200%
150%
3%
100%
Corporates
50%
Government
239%
196%
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
Households
0%
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Sources: BIS, IMF, Standard Chartered Research
69
Asia leverage uncovered
Based on net government debt, the
burden is not as serious as many
believe
Some argue that gross government debt to GDP exaggerates Japan‟s debt burden,
and that net government debt more accurately gauges fiscal sustainability and the
impact of the debt burden on growth and interest rates. Japan‟s net government
debt-to-GDP ratio is around 130%, just over half of gross debt to GDP. Excluding
JGBs held by quasi-public institutions such as the Bank of Japan (BoJ) and the
National Pension Fund, the ratio would decline further.
Corporate deleveraging
Corporate deleveraging started after
the asset bubble burst in the early
1990s, at the same time that the
government expanded its balance
sheet
Deleveraging in the corporate sector, which started after the asset bubble burst in the
1990s, has been a key driver of the increase in public debt. The government relied
on expansionary fiscal policy to sustain investment as the private sector scaled back.
Reinvigorating the corporate sector and reversing the deleveraging trend would help
to boost tax revenue, reduce public borrowing and put the economy back on track.
Unlike the government sector, Japan‟s corporate sector has excess savings and has
turned to a net lender from a net borrower. The average ratio of debt to assets for all
industries fell to 24% in 2012 from above 30% in the 1980s. The ratio for the
Figure 3: Government debt has accumulated as the economy weakened in the
past decade
Real GDP growth, % y/y (LHS), government debt as % of GDP (RHS)
8
250
6
Government debt as
% of GDP (RHS)
4
200
2
150
0
Real GDP growth
-2
100
-4
50
-6
-8
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
2012
Sources: CEIC, Standard Chartered Research
Figure 4: Japanese companies are currently in a
deleveraging phase
Figure 5: Recent JGB volatility has again sparked market
concerns
Debt-to-assets ratio, %
JGB 10 year, %
2.5
45
All industries
40
2.0
35
1.5
30
Manufacturing
1.0
25
0.5
20
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Sources: CEIC, Standard Chartered Research
01 July 2013
Sources: Bloomberg, Standard Chartered Research
70
Asia leverage uncovered
manufacturing sector dropped to 26% from above 40% during this period. Before the
global financial crisis, Japanese companies as a whole enjoyed a sharp rise in
profitability thanks to robust global demand, a relatively favourable exchange rate
and sound overseas operations. Rising income led to an increase in corporate gross
savings, reversing the previous trend of net borrowing. Corporates‟ reluctance to
invest due to rising deflationary pressure also contributed to the deleveraging
process. This explains why even the current low nominal interest rates are not
stimulating corporate investment, a situation commonly described as a „liquidity trap‟.
There are signs that Japanese companies may finally be starting to recover –
corporate ROE and ROIC are rising, and private investment and debt have stopped
falling. In the meantime, Japan‟s relatively high labour productivity growth rates
continue to offset poor demographics, while its competiveness, innovation and
complexity indices remain strong. Fiscal stimulus, monetary easing and a new growth
strategy under Abenomics may also give corporates a boost.
A reversal of the corporate
deleveraging process will help to
improve fiscal conditions and the
growth outlook
A reduction of corporate savings and a revival of the investment cycle would help to
end deflation and spur economic growth. They would also help to reduce public
spending, in turn benefiting growth. If the private sector‟s massive excess savings
are put to work and domestic demand and private investment momentum return, this
will help to end deflation. Ultimately, the fiscal position would improve thanks to
increasing tax revenues.
Risks and implications
A rise in JGB yields would pose
potential risks to Japan’s fiscal
sustainability
Recent volatility in the JGB market following the BoJ‟s April 2013 announcement of
„quantitative and qualitative monetary easing‟ has triggered new concerns about
Japan‟s public debt burden. The IMF estimates that an increase of 100bps in
average yields would raise debt servicing costs by an additional 2% of GDP. A JGB
bond shock could also lead to capital losses for principal creditors, Japanese banks
and pension funds. Any early exit by the BoJ or any slump in confidence in the
economic recovery could cause a spike in the JGB market.
Figure 6: Surplus in the external sector helps to offset the negative impact of
high public debt
JPY bn
30,000
140,000
Current account
FX reserves (RHS)
120,000
20,000
100,000
10,000
80,000
0
60,000
-10,000
40,000
-20,000
20,000
Financial account
-30,000
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sources: CEIC, Standard Chartered Research
01 July 2013
71
Asia leverage uncovered
Malaysia
Edward Lee, +65 6596 8252
Lee.Wee-Kok@sc.com
Malaysia’s household leverage is
becoming a burden
Less room for manoeuvre
While Malaysia‟s current leverage conditions remain generally healthy, we place it in
the „moderate risk‟ category. Room for manoeuvre has narrowed in the past few
years as leverage has risen amid an influx of global liquidity. While balance sheets in
the banking sector still appear relatively healthy, rising loan growth, particularly in the
property and household sectors, has raised questions about whether this rise is
sustainable in the long term. A sustained rise in interest rates, a slowdown in
household income growth, and/or a significant fall in property prices could cause
sustainability risks to multiply from current levels.
The current healthy outlook for the banking sector is supported by the decline in
NPLs. NPLs fell to 2% of total loans in February 2013, down sharply from 9.5% in
February 2006. Household NPLs fell to just 1.4% from 7.4% over the same period.
The government‟s Economic Transformation Programme aims to transform Malaysia
into a high-income country with per-capita GDP of USD 15,000 by 2020 (up from the
IMF‟s estimate of USD 10,578 in 2012). We expect this to support higher wealth
levels and a vibrant investment climate, leading to productive loan growth.
The government has actively
regulated the loan market
The government has taken several measures in recent years to improve the
sustainability of household indebtedness. Malaysia‟s current regulations do not allow
foreigners to purchase residential property valued at below MYR 0.5mn. To
discourage excessive speculative activity, Bank Negara Malaysia (BNM) has
implemented minimum loan-to-value (LTV) ratios of 70% for third and subsequent
home loans (effective November 2010), and 60% for housing loans to non-individuals
(December 2011). In the 2013 budget, the property gains tax was raised to 15% from
10% for sales of property within two years of purchase. To promote prudent
borrowing practices, the Guidelines on Responsible Financing (January 2012)
require financial institutions to assess affordability and existing debt obligations, while
capping the tenure of hire-purchase financing at nine years.
Further measures – particularly targeted at non-bank financial institutions (NBFIs) –
could help to support debt sustainability, in our view. NBFIs account for 12% of total
debt to the household sector but provided 57% of personal financing credit to
Figure 1: Summary of leverage and credit growth
Figure 2: Debt distribution
Debt/GDP, %
Malaysia
Total
credit/GDP
Debt service
ratio
200%
180%
160%
Economy
140%
181%
Government
120%
Private corporate sector
45%
48%
Household sector
79%
18%
100%
Corporates
80%
60%
40%
Households
20%
Government
56%
3%
Note: Malaysian government debt as per IMF estimates; the
government’s official government debt estimate is 52% of GDP.
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: BIS, IMF, Standard Chartered Research
72
Asia leverage uncovered
households, and NBFI loans have been steadily increasing in recent years. The
majority of borrowers from NBFIs earn monthly incomes of MYR 3,000 and below,
according to BNM‟s Financial Stability and Payment Systems Report 2012. A financial
crisis could potentially affect the repayment ability of these lower-income groups.
BNM is actively monitoring lending practices and has indicated that it is ready to act if
required. On 22 March 2013, Bank Negara Malaysia (BNM) Governor Zeti said that
“while personal financing by NBFIs grew by 30% compared to 9% seen in banks, the
financing by NBFIs was supported by automatic salary deduction schemes for
individuals with stable employment”.
Rising proportion of loans to the property and household sectors
Solid domestically led economic growth over the past decade, coupled with a flood of
international credit, has fuelled rising leverage in the banking system. A stable
interest rate outlook, competitive financing schemes and speedy processing have
allowed easy access to loans. Credit growth in the banking system has accelerated
in two waves – 2007-09 and 2010-present. The current wave of loan growth has
been the highest this decade, supported by a spike in money supply growth since
2011 (see Figure 4).
Figure 3: NPLs have fallen, both in absolute and relative
terms (NPLs as % of total loans)
Figure 4: Loan growth has been higher than previous
years (% y/y)
16
10
9
35
Loan growth
14
8
12
7
6
10
5
8
4
6
Banking
system
3
2
0
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
25
20
15
10
4
M2 (RHS)
2
Household
sector
1
0
Jan-01
Jan-13
Jan-03
Sources: CEIC, Standard Chartered Research
Figure 5: Property purchases have risen since 2010
Ppt contribution to loan growth
30
Jan-05
Jan-07
Jan-09
5
0
Jan-13
Jan-11
Sources: CEIC, Standard Chartered Research
Figure 6: Property is cheaper in Malaysia than in
Singapore
Housing price index relative to Singapore (Q1-2006=100)
16
14
Purchase of securities
Purchase of residential properties
Personal use
Others
Purchase of transport vehicles
Purchase of non-residential properties
Working capital
110
Singapore
100
12
10
Kuala Lumpur
90
8
80
6
4
Johor
70
2
0
2007
2008
2009
2010
2011
2012
Sources: CEIC, Standard Chartered Research
01 July 2013
60
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Sources: CEIC, Standard Chartered Research
73
Asia leverage uncovered
While overall loan growth has steadily accelerated, growth across sectors has been
uneven. Loans for property purchases, particularly non-residential properties, have
grown proportionally (Figure 5). While overall loans grew at a 9.2% CAGR from
2007-12, non-residential and residential property loans rose at CAGRs of 15.8% and
9.2%, respectively. This is significantly higher than growth in loans for working capital
(6.5% CAGR). Loan growth by sector shows a similar trend. While loans for
manufacturing and construction grew at 5.0% and 4.9% CAGRs, respectively, in
2007-12, real-estate loans surged 21.3% and loans to the household sector rose 9.2%.
We expect property demand to be sustained
We expect the surge in property loans of the past few years to persist in the medium
term, supported by competitive prices. Residential property prices in Malaysia rose at
a 6.2% CAGR in 2007-12, and at a faster pace of 8.3% in 2009-12. This lagged price
growth in Singapore (10.5% CAGR for 2009-12), which means Malaysian properties
are cheaper and may attract foreign demand. As Figure 6 shows, the housing price
index for Kuala Lumpur and Johor has fallen relative to Singapore‟s index since
2009. The median price of a condominium in Kuala Lumpur was c.MYR 0.5mn (c.
SGD 0.2mn) in 2012, much lower than Singapore‟s SGD 1.2mn.
Property demand is supported by
relatively competitive prices and
strong demand
Figure 7: GDP per capita versus housing prices
Figure 8: Household debt has remained at high levels
2005=100
Household debt-to-GDP ratio, %
130
90
Johor
85
Malaysia
120
80
75
Penang
70
110
KL
65
60
100
55
50
90
2006
2007
2008
2009
2010
2011*
2007
2012*
* Estimates, Sources: CEIC, Standard Chartered Research
Figure 9: The budget deficit has been gradually reduced
Government budget, % GDP
2008
2009
2010
2011
2012
Sources: CEIC, Standard Chartered Research
Figure 10: Current account surplus is likely to narrow
given slow export growth
% y/y (LHS), MYR bn (RHS)
0
50
-1
20
40
16
Imports
-2
Trade balance
(RHS)
30
-3
-4
-5
12
20
8
10
4
0
-6
-7
2007
2008
2009
2010
2011
2012
Sources: CEIC, Standard Chartered Research
01 July 2013
-10
Jan-10
0
Exports
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
Jul-12
-4
Dec-12
Sources: CEIC, Standard Chartered Research
74
Asia leverage uncovered
Iskandar Malaysia, a fast-growing economic zone in Johor, just north of Singapore, is
also attracting strong demand. On a recent trip to Iskandar Malaysia, we observed
strong demand for residential properties from Singaporean investors. On the nonresidential side, suburban malls located near the two Malaysia-Singapore causeways
could benefit from increased infrastructure and residential construction.
Risks to debt sustainability have risen as loan growth has outpaced income growth.
GDP per capita relative to housing prices has been decreasing since 2010 (Figure 7),
even as GDP growth has been consistently solid.
Household loan growth is likely to remain strong
Household debt has risen in recent
years
We believe the risk of high household debt growth remains elevated in the medium
term. Malaysia‟s ratio of household debt to GDP rose to 80.5% in 2012, the highest
since data became available in 2002; this compares with 60.4% in 2008 and 75.8%
in 2011 (see Figure 8). This was supported by 13.1% growth in loans for personal
use and a 4.1% increase in credit card receivables.
We have a more favourable outlook for credit card receivables. The annual increase
in outstanding credit card balances slowed to 4.7% in 2012 from 20.9% in 2007.
Credit lines extended to consumers have also been tightened – outstanding balances
as a percentage of credit lines extended rose to 25.1% in December 2012 from
24.1% in January 2007.
Government debt management appears sustainable
Government debt management
under control in Malaysia
The government has made progress on fiscal consolidation in recent years by reducing
its fiscal deficit target (see Figure 9). In the 2013 budget, Prime Minister Najib
announced a further reduction of the deficit target to 4% of GDP from 4.5% in 2012.
This is to be achieved via revenue growth of 0.7% and expenditure cuts of 0.4%.
According to official data, debt service charges have remained low for the past four to
five years, accounting for only 9.5% of total expenditure in 2012 (see Figure 11).
External debt has also been low, falling to 1.8% of GDP in 2012 from 2.9% in 2007 (see
Figure 12). Here too, though, room for manoeuvre has lessened. The current account
surplus could narrow further this year as a result of stronger import growth than export
growth (Figure 10), according to the BNM Annual Report 2012. Domestic debt rose to
51.7% of GDP in 2012 from 37.1% in 2007 (see Figure 12). Overall, government credit
metrics look healthy for now, but risks have risen as a result of global trends.
Figure 11: Debt service charges constitute a low
percentage of government expenditure
Figure 12: External debt has remained low
Government debt, % of GDP
% of government expenditure
60
Emoluments
55
Subsidies
Grants & Transfers
Domestic
45
Domestic debt service charges
Pension and Gratuities
40
Asset Acquisition
35
Other Expenditure
External debt service charges
30
0
5
10
15
20
25
30
35
Sources: CEIC, Standard Chartered Research
01 July 2013
External
50
Supplies and Services
2007
2008
2009
2010
2011
2012
Sources: CEIC, Standard Chartered Research
75
Asia leverage uncovered
Figure 13: Recent macro-prudential measures to address leverage conditions in Malaysia
Measure
Maximum loan-tovalue (LTV) ratio
for housing loans
Guidelines on
Responsible
Financing
Date
Implementation
Rationale
Nov 2010
Maximum LTV ratio of 70% applicable to third and
subsequent house financing facilities taken out by a
borrower
To mitigate excessive investment and speculative
activity, which was resulting in significant housing
price increases in some locations
Dec 2011
Maximum LTV ratio of 60% for housing loans to nonindividuals
Jan 2012
Financial institutions are required to make
appropriate enquiries into a prospective borrower‟s
income after statutory deductions for tax and
retirement fund, and consider all debt obligations, in
assessing the borrower‟s affordability
Maximum hire-purchase financing of 9 years
Propose for the
increase of the
real property
gains tax (RPGT)
Jan 2012
The government increased the real property gains
tax to 10% for sales of property within two years of
purchase and to 5% for sales between two and five
years
Sep 2012
The government increased the real property gains
tax to 15% for sales of property within two years of
purchase and to 10% for sales between two and five
years
To promote prudent, responsible and transparent
retail financing practices by financial institutions; to
encourage sound borrowing by helping consumers to
consider their ability to service all their debt
obligations without recourse to further debt or
substantial hardship
To discourage speculative activity in the property
market
Source: Bank Negara Malaysia
01 July 2013
76
Asia leverage uncovered
Philippines
Jeff Ng, +65 6596 8075
Jeff.Ng@sc.com
Loan growth is supported by
favourable financial and economic
settings, and capped by regulations
A structural improvement in leverage conditions
We place the Philippines in the low-risk category and see room for further leverage.
We expect credit growth to remain healthy and well managed in the next few years.
Although loan growth has picked up since 2011, the risk of over-leveraging is
modest, in our view (see Figure 3). Robust economic activity is likely to continue to
support loan growth in the medium term, particularly for the corporate sector. We are
optimistic that the Philippines‟ economic growth will outperform the region over the
next couple of years. Corporate loan growth will be driven by investment growth
under government‟s Public-Private Partnership model, sovereign credit rating
upgrades to investment grade, and bullish sentiment on the ground (see the
Philippines section of Standard Chartered Asia Focus, 13 March 2013). Low
domestic interest rates and flush liquidity will provide a supportive setting for
economic activity.
While we see a hard floor supporting loan growth, we also expect a ceiling to be set
by central bank regulation. Bangko Sentral Ng Pilipinas (BSP) has actively managed
leverage and liquidity from capital inflows since economic prospects turned positive
in 2011. It has introduced several macro-prudential measures to combat the threat of
over-leverage in the financial system. In 2012, foreign portfolio investment swelled to
nearly three times 2009 levels, rising to USD 18.5bn. Reductions in the special
deposit account (SDA) rate are the most frequently used macro-prudential measure;
the reserve requirement framework was also adjusted in February 2012. Further
tweaks are likely as BSP monetary policy switches to an interest rate corridor regime.
We view current leverage levels as
supportive of economic growth
With credit growth having a hard floor and ceiling, we believe leverage is in the
„Goldilocks‟ zone that is conducive to economic activity – growth is not too hot and
not too cold. The Philippines needs leverage to cover the shortfall in growth capacity
caused by a sluggish investment climate and low per-capita GDP relative to
neighbours like Thailand and Indonesia. A reasonable level of loan growth with the
proceeds used for productive investment builds productive capacity for the future. We
believe the marginal benefits of current loan growth levels are high, given that the
Philippines‟ investment-to-GDP ratio lags the region. However, a sustained increase
from current loan growth rates over the medium term could drastically increase the
risk of over-leveraging. It is important that higher loan growth translate into
Figure 1: Summary of leverage and credit growth
Figure 2: Government debt
Debt/GDP, %
Philippines
Economy
Total
credit/GDP
Debt service
ratio
80%
70%
60%
81%
50%
Private corporate sector
40%
33%
Government
30%
Household sector
6%
2%
20%
10%
Government
43%
32%
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
0%
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Sources: BIS, IMF, Standard Chartered Research
77
Asia leverage uncovered
investment in productive economic capacity, which we have not seen in the
Philippines in the past decade. Hence, government efforts to combat excessive
liquidity in the system are particularly important.
Banks’ balance sheets have been cleaned up
NPLs are falling, even as loan
growth is positive
Should the current positive leverage conditions persist, we expect NPLs to stay well
managed in the medium term. Banks‟ balance sheets are at their healthiest in many
years, even as BSP faces the challenge of balancing economic progress against
leverage risks. The banking system‟s NPL ratio fell to a record low in late 2012, the
culmination of many years of steady improvement (see Figure 4). In an economically
vibrant environment where loan growth is rising at a manageable pace and NPLs are
falling, see leverage as benign. Conversely, increased liquidity arising from
investment-grade sovereign ratings and growing international recognition pose a
potential threat of over-leveraging, which BSP needs to manage.
Consumer loans – Risks concentrated in mortgages and credit cards
Consumer debt carries higher risks
than corporate debt, in our view
The Philippines‟ 2012 growth outperformance and bright economic outlook have
triggered a rise in consumer loans, particularly mortgages and credit cards (see
Figure 5). On a recent trip, we observed that the country is experiencing a housing
boom (see On the Ground, 8 February 2013, Philippines – ‘Bullish local sentiment’).
Figure 3: Loan growth peaked in 2011
Figure 4: NPL ratio is at a record low
% y/y (LHS), % (RHS)
Commercial banks’ NPLs, % of total loans
30
8
25
7
20
Loan growth
15
10
Policy rate
(RHS)
5
20
18
16
6
14
5
12
4
10
3
2
8
6
4
0
1
2
-5
Jan-07
0
0
Jan-98
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Sources: CEIC, Standard Chartered Research
Figure 5: GDP growth is driving up consumer borrowing
Consumer loans, % y/y
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Sources: CEIC, Standard Chartered Research
Figure 6: Official stance of relying on domestic debt is
working
% y/y (total debt), ppt contribution (domestic and foreign debt)
30
30
25
Mortgage
20
Auto
Total debt
15
5
10
Credit card
5
0
-5
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Sources: CEIC, Standard Chartered Research
01 July 2013
20
10
15
0
Mar-10
25
Domestic debt
Foreign debt
-10
Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
Sources: CEIC, Standard Chartered Research
78
Asia leverage uncovered
Loan demand has been fuelled by strong consumer confidence, attractive financing
schemes (low interest rates, flexible monthly payments, longer loan tenors) and fast
approvals. Meanwhile, high penetration of mobile phones in less developed regions
has given low-income Filipinos access to microloans from telecommunications
companies (partnering with rural banks and other microfinance institutions).
The increase in consumer loans is likely to generate sustained domestic
consumption growth, given steady remittance inflows and strong consumer
confidence in the economy. Household consumption has contributed an average of
4.3ppt to GDP growth over the past eight quarters. The downside is that consumption
reduces savings and investment. To achieve a structural improvement in GDP
growth in the medium term, the Philippines needs investment growth to supplement
the consumption-driven economy.
While BSP has taken measures to soften consumer loan growth (such as the Truth in
Lending Act aimed at increasing transparency), we think risks associated with
mortgages and credit card loans have risen, though they are still manageable for
now. Income growth has lagged loan growth. GDP per capita rose at a 4.6% CAGR
from 2009-12 (6.8% in 2012), lagging consumer loan growth (13.5% CAGR in 200912, 16.1% in Q3-2012). Strong domestic consumption, low local interest rates and
further upgrades to investment grade may trigger faster consumer credit growth.
Household income growth will need to keep pace with loan growth to prevent
over leveraging.
Government shifts its reliance to domestic debt
The current administration has
made progress on debt
management
The Aquino administration has made notable strides in reducing the government debt
ratio. In its three years in power, its progress on fiscal consolidation has boosted
credibility and confidence, boding well for the medium-term outlook. Progress in debt
management has been critical to securing sovereign rating upgrades to investment
grade (see On the Ground, 2 April 2013, ‘Philippines – Investment grade and beyond’).
With the government debt-to-GDP ratio falling for a third consecutive year in 2012, the
Aquino administration has reversed the previous trend of rising debt (see Figure 7).
Nonetheless, debt remains high relative to Asian peers. Reducing the debt service ratio
should also ensure that government expenditure is focused on infrastructure
development, a key prerequisite for further economic growth (see Figure 8).
Figure 7: Government debt is still high, but falling
Figure 8: Lower debt service costs provide more leeway
for government spending (government debt service, % of
Government debt, % of GDP
GDP)
10
60
9
Principal
8
55
7
6
5
50
4
3
45
2
Interest
1
40
0
2007
2008
2009
2010
2011
2012
Sources: Bloomberg, Standard Chartered Research
01 July 2013
2007
2008
2009
2010
2011
2012
Sources: CEIC, Standard Chartered Research
79
Asia leverage uncovered
Secretary of Finance Cesar Purisima said on 18 March that the government aims to
source nearly all of its borrowing requirements locally in order to support the local
bond market. This is in line with the government‟s stance in recent years of meeting
most of its financing needs domestically (see Figure 6). Business World reported on
18 March that the government exceeded its target of 75% in 2012, meeting 84% of
its financing needs from domestic sources. In addition, President Aquino stated in the
2013 budget that the goal is to limit the budget deficit to around 2% for 2013-16. The
budget deficit was 2.3% of GDP in 2012 and 2.0% in 2011. We expect these moves
to source debt locally and narrow the budget deficit to be generally effective in
improving government debt sustainability.
On the whole, we see low risks to the Philippines‟ corporate and government debt
sustainability. While consumer leverage risks have risen, they are still manageable,
in our view. Economic growth, leverage management and the investment drive
should enable benign leverage conditions for the next few years. However, the
authorities need to remain vigilant to excessive liquidity inflows and potential asset
price bubbles.
01 July 2013
80
Asia leverage uncovered
Singapore
Edward Lee, +65 6596 8252
Lee.Wee-Kok@sc.com
Government debt to GDP is
technically high, but the Singapore
government does not incur any debt
for fiscal spending purposes
Leverage is comparatively high but manageable
We place Singapore in the „moderate risk‟ category because of the build-up of debt in
the household sector and the resulting debt service burden. The Singapore
government practises a very prudent fiscal policy, reflected in its AAA ratings from all
three international rating agencies. Singapore is one of the only 11 countries in the
world that enjoy this prestige. Although its debt-to-GDP ratio has exceeded 100% at
times, the Singapore government does not incur debt to finance its fiscal position.
Government debt is issued for two main purposes. First, marketable Singapore
Government Securities (SGS) are issued to develop the domestic debt market. This
debt is worth about 52% of GDP. Second, non-marketable SGS are issued to meet
the investment needs of the Central Provident Fund (CPF). This debt is worth about
69% of GDP.
Government bond proceeds are
invested, and cannot be spent by
the prevailing government
The proceeds of this debt issuance are not used to finance the expenditure of the
prevailing government. They are protected under the reserves framework in the
Constitution, and all borrowings are invested rather than spent by the government. In
addition, its fiscal position is solid. Including land sales and capital receipts (which
accrue primarily to past reserves), Singapore has run an average fiscal surplus of
about 6.2% of GDP for the past five years (2008-12; this includes a fiscal deficit of
1.6% of GDP in 2009).
Household debt is high, with
mortgages accounting for the bulk
of borrowing
Household leverage is high relative to other countries in the region, at 75% of GDP.
Housing loans account for the bulk of household debt, at 74% of total consumer
loans. Housing loan growth has been relatively rapid, at a CAGR of 12.1% from
2000-12; this has accelerated in recent years, to a 15.8% CAGR for 2006-12. Given
that property dominates Singapore‟s household debt, we examine a few metrics
below – including price-to-income and debt service ratios – to assess the risk level of
this household debt.
According to the 2010 census, 31.9% of resident households (a slight majority) live in
four-room government Housing Development Board (HDB) flats. To arrive at a median
price-to-income ratio for public housing, we have calculated the simple average of
median prices of such flats across Singapore. For income, we use average monthly
Figure 1: Summary of leverage and credit growth
Figure 2: Debt distribution
Debt/GDP, %
Singapore
Total
credit/GDP
Economy
255%
Private corporate sector
68%
Debt service
ratio
300%
250%
200%
64%
Government
150%
Corporates
100%
Household sector
75%
Government
113%
13%
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
Households
50%
0%
1996
1998
2000
2002
2004
2006
2008
2010
2012
Sources: BIS, IMF, Standard Chartered Research
81
Asia leverage uncovered
household income from work (including employer Central Provident Fund
contributions) for the 41st-50th decile income group. This data series is provided by the
Department of Statistics. We have also constructed a median price-to-income ratio for
private housing. Here, we use the median condominium price per square metre and
compare it to the average monthly household income of the 81st-90th decile.
The price-to-income ratio for HDB
flats has risen over the years, with
lower-income groups facing
relatively higher prices
As Figure 6 shows, the price-to-income ratio for public housing rose steadily from
about 4.1x in 2002 to 5.3x in 2011, before easing slightly to 5.1x in 2012. Note that
the public housing prices here are based on resale data. The leverage profile of the
lower-income group is more stretched. Using income for the 21st to 30th decile, and
comparing it to the average median price of a three-room HDB flat (resale market),
the ratio rose steadily to 6.1x in 2012 from 3.8x in 2002.
Government has already decided to
de-link primary sales of HDB from
secondary market to ensure
affordability of public housing
On a more positive note, Minister of National Development Khaw Boon Wan said in
March 2013 that the government aims to reduce the price-to-income ratio for built-toorder flats (new HDB sales) in non-mature estates to about 4.0x by de-linking primary
market prices from resale prices. The price-to-income ratio was about 5.5x in 2012,
according to The Straits Times (24 March 2013).
Figure 3: Singapore practises prudent fiscal policy
SGD bn; % of GDP
40
35
12%
10%
Fiscal surplus (RHS)
30
8%
25
20
6%
15
4%
10
2%
5
0
-5
0%
Fiscal surplus
-2%
-10
-4%
2008
2009
2010
2011
2012
Sources: Department of Statistics, Standard Chartered Research
Figure 4: Rising household leverage
Figure 5: Falling share of HDB mortgages
%
Mortgages, SGD bn
25%
Household liabilities as
% of GDP (RHS)
20%
15%
10%
5%
Housing loan growth, %
y/y
0%
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
90%
180
80%
160
70%
140
60%
120
50%
100
40%
40%
80
30%
30%
60
20%
40
10%
20
0%
Sources: MAS, CEIC, Standard Chartered Research
01 July 2013
0
Mar-95
Share of HDB mortgages relative to
total mortgages (RHS)
Financial
Institutions
70%
60%
50%
20%
Housing & Development Board
(HDB)
10%
0%
Mar-98
Mar-01
Mar-04
Mar-07
Mar-10
Sources: MAS, Standard Chartered Research
82
Asia leverage uncovered
The likely increase in loan amounts as housing prices rise means that if the economy
slows and unemployment rises, debt servicing may become difficult for people who
are over-leveraged and lose their jobs. A rise in interest rates from historically low
levels could have a similar effect. The current 3M SIBOR level of 0.375% compares
with the average of 1.45% from 2000-12 and a high of 3.56% in 2006. (from
November 2005 to March 2007, 3M SIBOR was above 3%).
We examine a debt servicing
scenario where interest rates rise
by as much as 3ppt
Figure 7 illustrates potential household exposure to rising interest rates. If we
assume a SGD 390,000 loan (about 80% of the median price of a four-room HDB flat
in 2012) with a 30Y tenor, priced at a rate of 3M SIBOR + 50bps, the monthly
mortgage payment will be about SGD 1,232. This is about 16% of the average
monthly income of employed households in the 41st-50th decile. If interest rates rise
by 1-3ppt, the shares of monthly income going towards mortgage repayment will rise
to 19% and 21%, respectively. This does not appear overly stretched, but it is based
on the assumption that household income remains stable.
Average LTV for housing loans is
low at 48% (as of Q4-2012)
The low average LTV ratio moderates the risk of over-leverage in the household sector.
As of Q4-2012, the average LTV was only 48%. The current low level of NPLs (0.3% as
of Q4-2012) in housing and bridging loans also reflects still-benign conditions. In
addition, the risk of the household sector is mitigated by HDB‟s role in disbursing
mortgage loans. As of Q4-2012, about 20% of total mortgages were under HDB, with
the rest from financial institutions. This reduces risk, as HDB is not as financially
sensitive as banks. However, due to the lower market interest rates offered by banks
(HDB currently offers mortgage loans of about 2.6%, versus about 1% for banks),
HDB‟s share of mortgages has fallen by more than half from about 46% in 2005.
Figure 6: Price-to-income ratios for residential properties
Years of annual income
8
7
Condo (100sqm)
6
5
4
4-room flat
3-room flat
3
2
1
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sources: CEIC, Standard Chartered Research
Figure 7: Scenario analysis – Singapore debt servicing
Assuming 30Y loan of SGD 390,000
Mortgage rate
Monthly household income
st
th
in 41 -50 decile
0.875%
1.875%
2.875%
3.875%
7,608
7,608
7,608
7,608
Monthly mortgage payment
1,232
1,417
1,618
1,834
Debt service ratio
16%
19%
21%
24%
Sources: CEIC, Standard Chartered Research
01 July 2013
83
Asia leverage uncovered
Debt servicing appears manageable
but prudence is required, as
pockets of over-leverage are
inevitable
While metrics currently suggest a manageable mortgage debt servicing burden at the
median level, the rise in leverage should be monitored. Pockets of over-leverage are
The government has introduced
seven rounds of property marketcooling measures, and reintroduced
financing restrictions for auto
purchases
The government has introduced numerous measures to cool the property market,
and in February 2013 it reintroduced restrictions on auto loans. Prices of vehicle
Certificates of Entitlement (government-controlled ownership permits) have declined
since then. Measures targeted at the property market have been less effective so far
given the continued rise in prices. However, we are now detecting some slowdown in
property transactions with the latest (seventh) round of measures, and we expect
property prices to stabilise. We believe these measures are prudent and will limit
systemic risk in the event of an economic deterioration.
Banking-system leverage is
understandably high due to
Singapore’s offshore financial
centre status
Singapore‟s financial sector also stands out for its high leverage. Given that
Singapore is an offshore financial centre, its financial-sector balance sheet relative to
GDP is understandably large. Most banks in Singapore operate both a domestic
banking unit (DBU) and an Asian currency unit (ACU). DBUs can conduct
transactions in all currencies, while ACUs are limited to foreign-currency transactions.
inevitable. Household debt to GDP has risen steadily to 75% of GDP currently from
55% in 2010, 45% in 2005 and 38% in 2000.
Including all DBU and ACU assets, banking-system assets are around 760% of GDP
(as of end-2012). DBUs account for around 41% of these assets, and ACUs account
for the rest.
Figure 8: Property and vehicle cooling measures
Vehicle purchase restrictions were reintroduced after a hiatus since January 2003
Date
Measures
Feb-2013
-
Financing restrictions on motor vehicle loans reintroduced
Maximum LTV of 50-60%; maximum loan tenor of 5Y
Does not apply to purchase of commercial vehicles and motorcycles
-
Seventh round of property market measures
Additional Buyer Stamp Duty (ABSD) imposed on permanent residents (PRs) buying first residential property
and Singaporeans buying second
ABSD raised 5-7% across the board
-
Residential property loan tenor capped at 35Y
Loans exceeding 30Y to face tighter LTV
LTV for non-individual borrowers lowered to 40% from 50%
-
ABSD introduced
Foreigners and non-individuals pay 10%; PRs pay 3% on second and subsequent properties and citizens pay
3% on third and subsequent properties
Jan-2011
-
Holding period for imposition of Seller‟s Stamp Duty (SSD) raised to 4Y from 3Y
SSD rates raised to 16%, 12%, 8% and 4% for holding periods of 1Y-4Y, respectively
LTV for non-individuals lowered to 50%
LTV for individuals with one or more outstanding mortgages lowered to 60% from 70%
Aug-2010
-
SSD holding period raised to 3Y from 1Y
LTV for second and subsequent mortgages lowered to 70% from 80%
Feb-2010
-
Introduction of SSD within 1Y of property purchase
LTV lowered to 80% from 90% on all housing loans except HDB loans
Sep-2009
-
Interest absorption scheme and interest-only housing loans scrapped for private properties
Jan-2013
Oct-2012
Dec-2011
Sources: MAS, Standard Chartered Research
01 July 2013
84
Asia leverage uncovered
DBU book is exposed to the
property sector, but mortgage
servicing ability appears
manageable
The majority of DBU assets, or around 54%, reside in loans. Of the total loan amount
under DBUs, business loans account for around 59%, and consumer loans make up
the rest. 74% of the consumer loans are housing loans. Business loans are
concentrated in the building and construction sector (27%), financial institutions
(23%), and general commerce (20%). Banks are exposed to the real-estate sector on
both the business and consumer sides of their DBU loan business.
To limit banks‟ exposure to speculative activity in the property market, the MAS
mandates a maximum Section 35 ratio („S35‟) of 35%. Banks‟ S35 property
exposures include loans to property and non-property corporations, housing loans for
investment purposes, property-related debt instruments, guarantees, performance
bonds, qualifying certificates and other contingent liabilities. As of Q3-2012, the S35
ratio was 16%, well below the 35% limit.
DBU book investment in Singapore
government securities is very
secure given Singapore’s AAA
credit rating
Interbank lending and investments in bonds issued by the Singapore government or
related entities account for around 19% and 13%, respectively, of total DBU assets.
We see limited risk from these exposures given the short-term nature of interbank
borrowing and Singapore‟s AAA credit rating. The external asset/liability mismatch of
the DBU book also appears limited. Net external liabilities minus external assets are
about SGD 5.9bn, or 0.6% of total DBU assets. This translates into a ratio of external
assets to liabilities of only about 98%.
DBU asset maturity profile has
increased over the years
However, asset/liability maturity matching for the DBU book appears to have
deteriorated moderately over the years. During the period from Q1-2009 to Q4-2012,
assets with maturities over 3Y increased their share of total assets by about 10ppt,
while the liability profile remained largely unchanged, with liabilities up to six months
accounting for about 90% of total liabilities (see Figures 9 and 10). So in Q4-2012,
the mismatch of net assets and liabilities with maturities of over 3Y was 32ppt of total
assets, up from 23ppt in Q1-2009. This should not be a significant issue, as the
mismatch may have resulted from falling interest rates, which drove liquidity towards
longer-dated assets. The trade should unwind as interest rates rise.
ACUs’ current external
asset/liability ratio is slightly above
the historical average
Under ACUs, the bulk of the assets (50% of the total) are interbank funds and are
largely short-term. We estimate that external assets under ACUs were about SGD
97bn higher than external liabilities as of February 2013. The ratio of external assets
to liabilities was about 1.14x as of February 2013, slightly higher than the historical
average of 1.10x since March 2004. This level is not unduly worrying, in our view.
On a more positive note, the maturity profiles of ACU assets and liabilities have been
relatively stable over the years. Assets with maturities of over 3Y rose by only about
3ppt of the total between Q4-2000 and Q4-2012, and this was matched by a 3ppt rise
in liabilities of over 3Y. In Q4-2012, the mismatch between net assets and liabilities of
more than 3Y was 6.8ppt of total assets, up slightly from 6.5ppt in Q4-2000.
01 July 2013
85
Asia leverage uncovered
Figure 9: Maturity profile of DBU assets
Figure 10: Maturity profile of DBU liabilities
% of total assets
% of total liabilities
100%
100%
90%
90%
80%
70%
60%
Up to 6
months
80%
Up to 6
months
70%
60%
50%
50%
40%
40%
Over 3Y
30%
20%
30%
20%
1Y to 3Y
6 months
to 1Y
10%
0%
Q1-2009
10%
0%
6 months
to 1Y 1Y to 3Y Over 3Y
Q4-2012
Q1-2009
Sources: MAS, Standard Chartered Research
Q4-2012
Sources: MAS, Standard Chartered Research
Figure 11: Maturity profile of ACU assets
Figure 12: Maturity profile of ACU liabilities
% of total assets
% of total liabilities
100%
90%
80%
100%
90%
Up to 6
months
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
10%
20%
6 months
Over 3Y
to 1Y 1Y to 3Y
10%
0%
0%
Q4-2000
Q4-2012
Sources: MAS, Standard Chartered Research
01 July 2013
Up to 6
months
6 months
to 1Y 1Y to 3Y Over 3Y
Q4-2000
Q4-2012
Sources: MAS, Standard Chartered Research
86
Asia leverage uncovered
South Korea
Eunhye Yoon, +822 3702 5072
EunHye.Yoon@sc.com
Highest private-sector debt in the region
We place South Korea in the higher-risk category. The country‟s ratio of private nonfinancial leverage to GDP is the highest in the region. However, high leverage is a
long-standing issue for Korea. Credit seasoning should limit the potential
consequences for growth, and we do not see current leverage levels leading to a tailrisk event. DSRs for both the corporate and household sectors are high, and this
could contain further growth. In addition, there is limited room to increase leverage,
further constraining growth.
Korea has experienced two boom-bust cycles in leverage since the early 1990s:
1991-97 and 2005-08. The booms in domestic leverage were accompanied by
increases in external debt. The busts that followed were the Asian financial crisis and
the global financial crisis. The boom periods were led by the corporate sector,
contrary to the common focus on Korea‟s high household debt. Korea has been in a
period of consolidation or „soft landing‟ for leverage since 2011: both GDP growth
and leverage growth have been slowing.
The first boom, from 1991-97, was
driven by the corporate sector,
fuelled by external debt, and
accompanied by strong investment
The first boom period (1991-97) was driven by the corporate sector, fuelled by an
increase in external debt, and accompanied by strong investment activity. Financialmarket liberalisation introduced as part of Korea‟s OECD membership caused a
surge in external debt, leading to an effective carry trade by banks and even small
companies (including, for example, a bowling alley in a rural area) that sought to take
advantage of the wide USD/KRW interest rate differential. Strong corporate
investment resulted in a sizeable current account deficit. Korea eventually faced a
crisis in 1997-98 that necessitated an IMF bailout, and subsequently led to a decline
in the total leverage ratio.
From 1998-2004, corporate leverage
eased, while government and
household leverage rose
Korea experienced a consolidation in leverage from 1998-2004. The ratio of leverage
to GDP rose in 2001-02 and fell in 2003-04, but we think these moves were too mild
to qualify as another boom-bust cycle. The corporate leverage ratio and external
debt-to-GDP ratio continued to decline until 2004. The household and government
leverage ratios rose sharply during this period. The surge in household debt in 19992002 was led by bank loans (including mortgages) and credit cards, resulting in a
plunge in the household savings rate and the subsequent housing-market boom.
Figure 1: Summary of leverage and credit growth
Figure 2: Debt distribution
Debt/GDP, %
South Korea
Total
credit/GDP
Debt service
ratio
250%
200%
Economy
Government
232%
150%
Private corporate sector
Household sector
113%
85%
79%
15%
100%
Corporates
50%
Households
Government
35%
25%
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
0%
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Sources: BIS, IMF, Standard Chartered Research
87
Asia leverage uncovered
Policy makers explicitly encouraged household borrowing and credit cards. A sudden
rise in credit card defaults in 2002 caused consumption to contract in 2003 and 2004,
though overall household debt continued to rise. The increase in government debt
was the result of active fiscal easing, bailouts of troubled financial institutions and FX
market intervention.
The second boom, from 2005-08,
was driven by corporates and
accompanied by rising external
debt, with moderate strength in
domestic demand
The second boom period, from 2005-08, was also driven by the corporate sector and
was accompanied by a sharp increase in external debt, while domestic demand was
only moderately strong. The household and government leverage ratios also rose
considerably. This time, the increase in external debt was not driven by banks‟ or
corporates‟ carry trades, but by FX hedging by exporters and domestic investors on
overseas assets, and arbitrage by foreign banks taking advantage of the wide swap
basis. The government may be have been partly responsible for the increase in
external debt, as it encouraged overseas investment (but not FX hedging). Despite
the absence of classic signs of impending problems – overheating domestic demand,
a current account deficit and currency mismatches – the surge in external debt
turned out to be a severe burden on the Korean economy as the global financial
crisis led to a global credit crunch.
Leverage began to consolidate again in 2009, and this process continues today. The
ratio of leverage to GDP declined in 2010, although it rebounded in 2011 and 2012
as GDP growth slowed. Leverage growth slowed in 2012 across the government,
corporate and household sectors, leading to sluggish domestic demand and a
housing-market slump. Strong growth in state-owned companies‟ debt and non-bank
financial institutions‟ household lending was a concern until 2011, although it slowed
in 2012. Government measures to contain household debt and (short-term) external
debt have been quite successful in recent years. However, the government is now
shifting its policy priority from stability to growth, and has eased regulations on
mortgages to boost the housing market.
Outlook: Government to lead the next cycle
The next leverage cycle is likely to
be government-led; Korea has no
legal ceiling on government debt or
the fiscal deficit
The next leverage cycle is likely to be government-led. The new government of
President Park has introduced a supplementary budget to boost economic growth,
which will naturally accelerate the rise in government debt. Government debt may
increase further in four to five years under Park‟s plans to expand welfare
programmes. The law on public finance does not stipulate a ceiling on government
debt or the fiscal deficit, only setting conditions for a supplementary budget. The
leverage of state-owned companies, at around 31% of GDP, remains a key risk
factor, in our view.
However, we see a low risk of another boom-bust cycle driven by (private) corporates
or households, as borrowers and lenders are well aware of still-high levels of
leverage. Also, Korea‟s low household savings rate (around 3%) and high
investment-to-GDP ratio (around 28%) suggest no further room for an overheating of
domestic demand.
01 July 2013
88
Asia leverage uncovered
Taiwan
Tony Phoo, +886 2 6603 2640
Tony.Phoo@sc.com
Rapid rise in private-sector debt is a concern
We place Taiwan in the low-risk category, with room for further leverage. The buildup of both private- and public-sector debt in the past decade has been rapid, as
Figure 3 shows, but DSRs are largely at benign levels. The government DSR is
considered to be on the higher side, but this is due to the inclusion of short-term debt
rather than high interest costs. Total outstanding household, corporate and
government debt jumped more than 70% to nearly TWD 21tn (149% of nominal
GDP) in 2012 from 122% in 2000, but the ratio of total outstanding debt to GDP
remains among the lowest in the region – and is particularly low in comparison to
Hong Kong, Singapore, and South Korea. The rapid rise in Taiwan‟s debt in recent
years suggests that a period of consolidation is due. This is especially true when one
considers associated risks to the local banking system, as well as the potentially high
bailout costs when the economy undergoes a deleveraging process.
Divergence between corporate debt and investment is a concern
The gap between corporate debt
and investment growth has widened
Corporate debt has expanded in recent years. The ratio of total corporate debt to
GDP rose to 61% in 2012, after remaining largely stable at around 50% prior to the
2008 global financial crisis. This was driven largely by rising credit demand from
SMEs, supported by government credit guarantees during the crisis to counter falling
demand and soaring unemployment. The SME sector employs about 80% of
Taiwan‟s more than 10mn workers.
We are concerned about the divergence between the rising corporate debt-to-GDP
ratio and the falling investment-to-GDP ratio (Figure 4). This gap suggests that local
corporate borrowings are not being put to effective use to finance capital investment.
We believe a large part of these borrowings is being used to finance business
operations in mainland China; this view is supported by the surge in bank lending via
domestic banks‟ Offshore Banking Units, or OBUs (Figure 6). We are concerned that
the rise in corporate debt may not generate future growth and employment in the
domestic economy.
Figure 1: Summary of leverage and credit growth
Figure 2: Debt distribution
Debt/GDP, %
Total
credit/GDP
Taiwan
Debt service
ratio
180%
160%
140%
Economy
149%
Private corporate sector
61%
Government
120%
100%
80%
Corporates
60%
Household sector
48%
7%
40%
Households
20%
Government
40%
17%
* Based on BIS data; the government estimates government debt to
GDP at about 40% in 2012;
0%
2000
2002
2004
2006
2008
2010
2012
Sources: BIS, IMF, Standard Chartered Research
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
89
Asia leverage uncovered
Rising household debt is a potential threat to the economy
The recent rapid rise in household debt may pose future challenges to the economy,
in our view. Consumer loans have increased by almost 60% in the past decade, to
TWD 6.8tn in 2012. This is equal to 48% of nominal GDP, up from 42% in 2000. The
growth has been driven by a surge in mortgage loans, which accounted for 80% of
consumer loans in 2012, up from just 60% in 2004-05. Following Taiwan‟s 2005
credit card crisis, local banks focused on mortgage lending as they sought to improve
their margins and asset quality. The subsequent property-market boom – aided by a
sharp fall in interest rates, the increasing availability of housing loans with longer
tenors, and the introduction of financial assistance for first-time home buyers – has
fuelled speculative activity and driven demand for mortgages (Figure 5).
Macro-prudential measures help
counter property market-related
risks
The government has introduced several property market-cooling measures in the
past three years to quell speculative activity in the residential market. It has lowered
loan-to-value (LTV) ratios for purchase of residential properties in major districts,
raised mortgage rates for second home purchases, implemented a „real-value‟
residential pricing system, and imposed a transaction tax on residential properties
that are sold within two years of purchase. The government has also started building
affordable housing in a bid to ease surging home prices, though we question the
effectiveness of this programme given its stringent requirements. We believe the
perceived mismatch between housing supply and demand will continue to support
the local property market. A continued rise in mortgage demand will cause household
debt to increase further. If policy makers do not adequately address the negative
yield environment, we also see a rising risk of a future asset bubble.
The worst-case scenario
A sharp decline in residential property prices (i.e., 20-25% in the capital of Taipei),
would significantly reduce homeowners‟ equity. This would be more worrisome if
accompanied by a sharp slowdown in economic activity that caused companies to
cut capex and hiring. In such a scenario, financial institutions – particularly those
focused on real-estate lending – would likely limit lending due to the rising risk of bad
loans. A rise in interest rates would further exacerbate the situation, as the resulting
credit tightening and higher interest costs would increase the household mortgage
burden, which has been rising in recent years (see Figure 7).
We believe the risk of such a scenario is low for now. We expect Taiwan‟s economy to
stay resilient given its healthy current account balance, large foreign reserves, and low
Figure 3: Total outstanding public- and private-sector
debt has increased significantly (TWD tn)
Corporate
25
Government
Household
Figure 4: Widening gap between corporate debt and
investment ratios
70%
60%
20
Corporate
debt % GDP
50%
15
40%
30%
10
20%
5
Private
investment %
GDP
10%
0
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: CBC, Standard Chartered Research
01 July 2013
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: CBC, Standard Chartered Research
90
Asia leverage uncovered
external and public debt. These factors suggest that it would be less vulnerable than its
regional peers in the event of a liquidity squeeze or credit crisis. Also, given fragile
market confidence and rising market volatility, we expect local policy makers to maintain
a cautious and pro-growth policy stance, aided by relatively prudent fiscal policy.
Government debt has expanded rapidly, but is least concerning
Total government debt surged to 40% of GDP in 2012 from just 27% in 2000
(Figure 2). The government significantly increased public spending during the
2001-02 recession and the 2008-09 global financial crisis. In 2008, local lawmakers
approved a TWD 500bn (c.4% of GDP) stimulus package to boost an economy
battered by weak external demand. As a result, central government debt swelled to
TWD 5.7tn in 2012 from TWD 4.3tn in 2008.
We are not overly concerned by the rapid rise in public-sector debt, however. We see
limited room for further increases over the longer term given the 40% regulatory cap
on the government debt-to-GDP ratio. Annual government loan financing is also
limited to a maximum of 15% of budgeted expenditures. We see a very low
probability that local lawmakers will consider lifting the 40% debt ceiling in the near
future. This should put a firm lid on future growth in public debt.
Figure 5: Negative interest rate yields lend strong support to residential
property prices
PPI index (LHS); inflation-adjusted mortgage rate (RHS)
160
-4
140
Mortgage rate,
inflation-adj., 3-yr fwd
120
Cathay PPI - Taipei
(RHS)
100
80
-2
0
2
60
4
40
6
20
0
8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Sources: Cathay Real Estate, Standard Chartered Research
Figure 6: Demand for OBU lending among non-FI clients
has jumped (USD bn)
Figure 7: Overall mortgage burden rose significantly in
the past 10 years
Ratio of mortgage payments to household income ratio
40%
80
38%
70
36%
60
34%
50
32%
40
30%
28%
30
26%
20
24%
10
22%
20%
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: CBC, Standard Chartered Research
01 July 2013
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: Ministry for Interior, Standard Chartered Research
91
Asia leverage uncovered
Thailand
Usara Wilaipich, +662 724 8878
Usara.Wilaipich@sc.com
Growing leverage
We place Thailand in our low-risk category on an economy-wide basis. The country‟s
external financial position is strong thanks to net positive outstanding foreign
reserves and still-low foreign ownership of government bonds. There is still plenty of
room for more leverage in the corporate sector. Even so, we believe the speed of the
rise in household leverage is an issue, and that liabilities in the public sector need to
be closely monitored.
Still-low leverage in the corporate sector
The memory of the 1997 crisis and
the existing spare production
capacity are key factors behind low
leverage in the corporate sector
With the memory of Thailand‟s 1997 financial crisis still alive, local businesses have
adopted a cautious approach to borrowing and leverage. To recall, after the Thai
baht (THB) floated in July 1997, excessive borrowing of short-term foreign-currency
debt to finance long-term projects in local currency (especially property projects)
created a lethal maturity and currency mismatch. This resulted in huge bad debts in
the banking sector and widespread corporate bankruptcies.
Following this experience, the Thai corporate sector has continuously deleveraged
since the Asian crisis. Non-financial corporates listed on the Stock Exchange of
Thailand had an average debt/equity ratio of just 1.0x as of end-2012, according to
SET data. This compares with more than 10.0x before 1997.
Low corporate leverage is also partly the result of under-investment due to spare
production capacity in several industries, a legacy of the pre-crisis period. The ratio
of private investment to GDP has fallen below 20% in recent years, from about 40%
prior to 1997. Meanwhile, companies‟ debt servicing ability and liquidity have
remained strong, as reflected in the average interest coverage ratio of about 3.0x.
Consumer loan growth has
accelerated, partly due to
government measures to boost
consumption
We see a need for more vigilance on leverage in the household and public sectors,
which is rising in part due to recent structural changes.
Rising household leverage
A key structural change since the Asian crisis has been the deepening of Thailand‟s
financial markets, particularly the growing importance of the fixed income market as
an alternative source of funding for the corporate sector; before 1997, the Thai
Figure 1: Summary of leverage and credit growth
Figure 2: Debt distribution
Debt/GDP, %
Thailand
Total
credit/GDP
Economy
166%
Debt service
ratio
250%
200%
150%
Private corporate sector
53%
65%
Household sector
68%
12%
Government
45%
12%
Government
100%
Corporates
50%
Households
Sources: Bloomberg, BIS, IMF, Standard Chartered Research
01 July 2013
0%
1998
2000
2002
2004
2006
2008
2010
2012
Sources: BIS, IMF, Standard Chartered Research
92
Asia leverage uncovered
corporate sector relied mainly on bank credit. With less business from corporates,
banks have been forced to focus more on consumer and SME loans. Fiscal policy
has also been supportive of consumer lending. Political parties have increasingly
used populist policies aimed at boosting consumption to gain popularity among
voters. The most recent example of such a measure is the tax rebate for first-time car
buyers implemented in 2012.
Against this backdrop, banks‟ consumer loans rose to about 31.5% of GDP in 2012
from 25.4% in 2009 and 21% in 2005. At the same time, household debt has risen.
However, households‟ financial conditions remain healthy for now, in our view. The
ratio of households‟ debt to financial assets was a low 46.6% as of Q4-2012, while
the NPL and delinquency ratio of consumer loans was moderate, at 4.7% of total
loans, according to Bank of Thailand (BoT) data. Although we see no signs yet of an
imbalance in the household sector, increased vigilance may be needed if robust
consumer loan growth continues. Excessive household leverage could increase the
economy‟s vulnerability to shocks.
Fiscal stimulus measures are building contingent liabilities
Contingent liabilities should be
taken into account when assessing
the future government debt position
Thailand has maintained a prudent fiscal position in the past 10 years, as reflected in
persistently low public debt and annual budget deficits below the legal ceiling of 4%
of GDP. Public debt has gradually risen in recent years, to 45% of GDP at end-2012
from 37% in 2008, due to a series of fiscal stimulus measures. While this level is not
worrying, contingent liabilities need to be taken into account when assessing
Thailand‟s future government debt position. The government has increasingly used
off-balance-sheet funding for fiscal stimulus measures such as the rice pledging
scheme, the water management project, and a THB 2tn public investment plan over
the next seven years. Rising contingent liabilities can end up as liabilities of the
government, while higher public debt will reduce the government‟s capacity to absorb
economic shocks in the future.
Figure 3: NPLs (% of total loans)
Figure 4: Consumer loan growth has accelerated (% y/y)
25
8
7
20
6
5
15
4
10
3
2
5
1
0
2006
2007
2008
2009
2010
2011
2012
Source: BoT
01 July 2013
0
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Sources: BoT, Standard Chartered Research
93
Asia leverage uncovered
Appendix
How we have constructed our data
While detailed public-sector debt statistics have been available for several years now, private-sector credit for several
economies – particularly emerging economies – has included only bank loans, excluding many non-bank-financial institutions
and non-loan debt instruments. In March 2013, the Bank for International Settlements (BIS) published a long data series on
credit to the private non-financial sector7 that addresses these deficiencies. This data forms the basis of our analysis in this
report. This new BIS database includes credit provided to the private non-financial sector by domestic banks, all other sectors of
the economy and non-residents. It includes both loan and debt securities and is available on a quarterly basis. The IMF publicsector debt database provides government-level debt statistics over several years.
We have built on these databases, augmenting and adjusting estimates in some sectors and economies to better reflect real onthe-ground risks. The result is a comprehensive Asia leverage database that combines the breadth of the multilateral
organisations‟ data with the depth of our on-the-ground expertise to provide a true picture of the Asian leverage landscape.
In addition, we have added credit data for Asian economies not included in the BIS database, namely the Philippines and
Taiwan. All data has been sourced from publicly available databases – multilateral sources including the BIS and IMF and
country sources including central banks and finance ministries. In addition, for several countries, we have reconstructed data
from multilateral sources using a bottom-up approach to further validate our database and increase its granularity. The details of
the database used for this report are outlined below.

Inclusion: The database includes leverage data for 12 economies in Asia: Australia, China, Hong Kong, India, Indonesia,
Japan, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

Lenders: Borrowings from all sources are included – banks, non-bank finance intermediaries, foreign financial institutions,
non-residents and other sectors of the economy. For the Philippines and Taiwan, only bank lending is included for the
private sector.

Instruments: Credit covers all financial instruments, including loans and debt securities.

Granularity: Data for each economy is broken into public and private financial-sector debt. The private non-financial sector
is further segregated into private non-financial corporate sector borrowing and household borrowings. For most economies,
private non-financial sector debt is broken down to a more granular level, by product and sub-sector. This enables us to
assess the country‟s debt burden with an acute level of detail – for example, mortgage debt issued by non-banking financial
entities to households in South Korea.

Duration and frequency: The time series now goes back much further than previously, to the early 1990s for most
countries. The time series is on a quarterly basis, updated through Q3-2012.
Figure 1 shows the composition of our database, listed by region and sector. Standard Chartered Research data has been
constructed by consolidating data from various local public sources, including central bank and finance ministry databases.
7
„How much does the private sector really borrow? A new database for total credit to the private non-financial sector‟, BIS quarterly review, March 2013
01 July 2013
94
Asia leverage uncovered
Figure 1: Asia leverage – Data construction
Economy
Households
Corporates
Government
Australia
BIS
BIS
IMF
China
Standard Chartered Research
Standard Chartered Research
Standard Chartered Research
Hong Kong SAR
BIS
BIS
IMF
India
Standard Chartered Research
BIS
Standard Chartered Research
Indonesia
BIS
BIS
IMF
Japan
BIS
BIS
IMF
Korea
BIS
BIS
IMF
Malaysia
Standard Chartered Research
Standard Chartered Research
IMF
Philippines
Standard Chartered Research
Standard Chartered Research
IMF
Singapore
Standard Chartered Research
BIS
IMF
Taiwan
Standard Chartered Research
Standard Chartered Research
IMF
Thailand
BIS
BIS
IMF
Source: Standard Chartered Research
In particular, we have adjusted the debt estimates provided by the BIS and IMF for China, India and Singapore households and
used in-house estimates gathered from local databases to construct the time series for the private sectors of Malaysia, the
Philippines and Taiwan.

China: We treat debt extended to local government investment vehicles (LGIVs) and the Ministry of Railways as obligations
of the government. Our estimate of China‟s corporate debt excludes these debt obligations. Our estimate of China‟s
government debt, at 78% of GDP, is therefore higher than the IMF‟s.

India: We believe that household debt should include agricultural loans extended to farmers, which in India are essentially
households. We classify household debt as including loans extended by banks, agricultural loans extended to farmers, and
loans from other lenders including financial institutions, government agencies and co-operative societies. Where unavailable,
quarterly data has been obtained by aggregating individual components obtained by interpolation. In addition, we have used
government debt as provided by the Ministry of Finance, instead of the IMF estimates.

Singapore: We believe that the BIS data omits Housing and Development Board (HDB) mortgage loans. We construct our
estimate of household leverage from the quarterly household sector balance sheet provided by the Monetary Authority of
Singapore (MAS). This includes mortgages extended by financial institutions and the HDB, as well as personal loans, which
include motor vehicle loans, credit and charge card liabilities, and others.

Malaysia, Philippines, Taiwan: Since the BIS only provides overall private-sector debt for Malaysia, we construct the
breakdown by estimating household leverage through quarterly personal loan and mortgage data provided by Bank Negara
Malaysia. We use a similar approach to estimate private-sector leverage for the Philippines and Taiwan, which are not
included in the BIS private-sector database.
01 July 2013
95
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