December 8, 2017 7:00 am JST
Anthony Rowley

Asia's debt mountain looms ever larger

Recalling the 1997 and 2007 crises, policymakers should take more care about rising borrowings

Asia's debt mountain demands attention. © Getty Images

Is Asia (and maybe the world) enmeshed in a new cycle of 10-yearly debt crises? It is tempting to think so, given the events of the past couple of decades. This year marked the 20th anniversary of the Asian debt crisis and the tenth annual commemoration of the 2007 Global Financial Crisis. Now a decade further on, there are indications in 2017 that yet another debt crisis may be building, and not just in Asia.

Anyone speculating upon where the crisis might erupt might say China. There are indeed risks of a major debt problem occuring among Chinese state-owned enterprises, private companies and local government administrations. But the truth is that China's debt "mountain" is but one in a range of peaks within and beyond Asia.

Since the 2007 crisis, world debt has risen to some $217 trillion or a record 325% of global gross domestic product, according to the Institute of International Finance in Washington. Some $165 trillion is in mature economies and $53 trillion in (mainly Asian) emerging economies.

As Tim Adams, a former senior U.S. Treasury official and now head of the IIF, commented recently: "With borrowing costs across mature and emerging markets rising, concerns about high global debt levels have returned to the fore."

Politics over prudence

Some economists argue that, despite the prospect of a short-term pickup, interest rates are, fundamentally, likely to remain low for long, because of the surplus of global savings over investment. They say there is therefore no need to worry unduly about the combination of record high debt and an expected rise in interest rates in the immediate future.

But the fact is that the debt burden is huge and rates are rising. Somebody, somewhere, will have to shoulder the extra costs.

Policymakers have invariably vowed after each crisis to "never to let it happen again," yet politics often dictates that economic growth and expansion must be maintained at all costs -- even when prudence would dictate otherwise. So easy money policies stay in place for too long.

We may be at such a point now. The global financial system was flooded with liquidity by leading central banks after the crisis to shore up financial institutions and prevent another 1930s style Great Depression.

This great liquidity boom led (as intended) to a plunge in interest rates -- to their lowest levels since the 16th century in real terms, according to Eisiuke Sakakibara, Japan's former vice finance minister for international affairs.

So the solution to one crisis may have sown the seeds for the next. The crisis that now looms over Asia and beyond is really different in scale from those that have gone before. The very fact that interest rates have been at such historic lows -- in nominal and real (inflation-adjusted) terms -- has encouraged huge borrowing among nonfinancial companies and households.

Moreover, when interest rates rise from a very low base, the borrowers' pain is especially severe. Paul Gruenwald, chief Asia-Pacific economist at S&P Global Ratings, has noted that "if rates go from 4 to 5% that is an increase of 25% but if they rise from 1 to 2% that is an increase of 100%."

Concern centers on China where (according to the IIF) "over the past four quarters, the rise in the U.S. dollar value of total debt has been sharpest, rising by some $2 trillion to over $32.7 trillion." But the debt buildup is also posing worries in other parts of Asia, including in Malaysia, South Korea and India, says the IIF.

Overall, "emerging market debt reached 218% of GDP in the first quarter of 2017, five percentage points higher than a year ago," the IIF said recently. The high level of foreign-currency borrowing among some Asian emerging economies has echoes of the 1997 Asian financial crisis.

The trigger for a possible new crisis could be the impending further rise in U.S. interest rates. What happens now that the Federal Reserve has started tightening policy "is a profound question, which is not getting enough attention," says Charles Dallara, a former senior U.S. Treasury official who is now executive vice-chairman of private capital firm Partners Group.

He adds: "Analysis implies that because the Fed has telegraphed [its intentions], this is unlikely to have disruptive effects on the economy. But there is the supply and demand factor that needs to be taken into account as the Fed withdraws its purchases of Treasurys and other securities."

Few listening to warnings

Dallara says: "Already since markets realized the Fed is serious about monetary tightening, 10-year rates have bounced up by 20 basis points (one fifth of a percentage point) and I think there is a good chance that we will see a continuing rise in rates regardless of when the Fed moves again."

Rising U.S. interest rates are by no means the only risk factor. High or increasing private sector indebtedness in China, Australia, Korea, Malaysia, Singapore and Thailand could eventually undermine bank credit quality, as could property sector risks in China, Hong Kong, Australia and New Zealand, as financial services group Standard & Poor's notes. Any slowdown in economic growth could hit cash flow at companies and households alike, not to mention optimism about property.

Nonperforming asset ratios are likely to remain relatively low in some jurisdictions (including Taiwan, Australia, Hong Kong, Japan) but much higher in some others, notably India, says S&P. Moreover, debt is still rising -- the agency expects Asia-Pacific debt to rise further to $67.4 trillion next year, an increase of 8.4%, up from the 7.5% forecast for 2017.

In mature economies, government sector debt remains worryingly high, including in Asia. Although the U.S. government continues to be by far the world's biggest borrower in absolute terms, Japan has the highest sovereign debt levels in the world -- 254% of GDP in 2016.

The IIF says: "Against this backdrop, planned fiscal stimulus could add to upward pressure on borrowing costs, prompting concerns about debt sustainability."

There is thus no shortage of warnings about what could happen as a record level of debt meets the coming rise in interest rates. The danger is that too few people seem to be listening, whether policymakers, bankers, corporate executives or householders.

Anthony Rowley is a Tokyo-based journalist who has been covering the Japanese economy and politics since 1993. He is a former business editor and international finance editor of the Far Eastern Economic Review, and a former Tokyo correspondent of the Singapore Business Times.

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