By Aishwarya Bagri
Since the 2008 financial crisis, debt in almost all countries has risen, but at the epicentre of this unprecedented rise is Asian debt. After 2008, the US economy like most others dipped into recession. To fight the downward spiral, central banks cut interest rates to spur demand. This causes two things – a revival in the global economy and a drop in the cost of credit. This has led to a rapid rise in borrowing in the Asian economies.
The Asian story
Recent history shows that leverage growth in most Asian countries from 2007 to 2015 has beaten its American and European counterparts. For instance, a PIMCO study suggests a hundred percent increase in Chinese debt to GDP ratio, bringing the country’s debt levels closer to that of developed economies like the US and UK. Albeit, it must be understood that countries like Indonesia, India and China are inevitably going to borrow more.
However, Asia’s credit growth story is different from that of the developed economies. In contrast to the US and the Eurozone, corporate debt amounts to half of the total debt to GDP. Moreover, Asian countries are in a more resilient position as compared to that during the Asian Financial Crisis. Does this credit burden imply that the major contributor to global economic growth, like Asia, is going to hit a slowdown? Of course, such high levels are going to have implications for high non-performing loans, moral hazard and financial turmoil, but there might be certain features specific to the Asian economy capable of mitigating the impact.
Favourable and unfavourable factors
Emerging Asian markets have definitely worked their way towards stronger fundamentals, which has been reflected in resilient financial markets in the area, in spite of volatile capital flows. Taking the case of India as an example, the manufacturing sector has staged a comeback in December 2017 as the effects of de-stocking due to GST and demonetization fade away. Though the government revised its fiscal deficit target for 2018-19, the important metric remains well within the limit.
Even countries like Malaysia, India and Taiwan have seen a movement in their credit ratings. Moody’s stated this year that though Malaysia’s current foreign reserves aren’t enough to meet its gargantuan external debt, the nation’s consistent economic growth, decent global asset position and large export proceeds would reduce the vulnerability.
Additionally, inflation is rising at moderate levels in China and India. Regional inflation is making a recovery, at around 2 percent currently, after the dip in commodity prices in 2014. It can be seen that monetary policy in China and India is stabilizing and real interest rates in both the countries are the highest in the Asian region. The global economy has picked up growth again. This works in favour of various emerging Asian markets which are based on an export model, even trade hubs like Singapore are benefitted.
It must be recognized that not all these benefits will accrue to Asia in the coming years. For instance, the advantage of global demand growth is offset by rising protectionism in most advanced economies, which are a source of income generation for these export-based developing countries. There are other issues as well bogging down Asia. One such issue being stress in the banking sector due to rising gross non-performing assets. This can adversely impact these emerging markets, due to their high debt burdens. India’s total NPAs of Rs 10 lakh crores are bogging down a spurt in demand growth. China’s ageing population and its housing bubble will make it tougher for the country to mitigate the impact of its huge debt, but the country can afford tools like quantitative easing.
Asia to remain a global growth engine
Oxford Economics Ltd. forecasts that non-financial & household debt would be well above 100 percent of GDP for most Asian economies except Japan. But strong fundamentals of the region, betterment in the global economic scenario and the strength of numerous Asian governments to take on the debt at minimum impact, will not derail growth in the region. Thus, even with growth declining to 3.5 percent in 2030 from 5 percent currently, Asia shall remain the global growth engine. Soaring debt levels will binge on its climb but not derail it.
Featured Image Source: Visual Hunt
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