High household debt manageable: Moody's
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The high level of household debt in a number of Southeast Asian countries poses a risk for private consumption growth and banks' asset quality, but is ultimately manageable, says Moody's Investors Service.
“While elevated household debt could place refinancing pressure on mortgage and consumer credit as the global credit cycle gradually tightens, Southeast Asian bank systems are largely sound and can withstand significant asset deterioration,” said Rahul Ghosh, a Moody’s vice president and senior research analyst.
“In addition, if these stresses begin to affect the wider economy, regional governments can implement counter-cyclical policies to support domestic demand.”
With the US Federal Reserve likely to raise interest rates next year, capital inflows to Southeast Asia will moderate, says Moody’s. Rapid growth in consumer credit has led to several pockets of high household leverage.
Malaysia and Thailand are most vulnerable to rising interest rates, because of high overall indebtedness and a rapid pace of credit accumulation in recent years, notes the rating agency. Household debt as a share of gross domestic product was high for both, at 87 per cent for Malaysia and 82 per cent for Thailand, at the end of 2013, it says.
In addition, household debt relative to income levels in the two countries is also elevated, suggesting that debt-servicing capacity in both is likely to become problematic as credit conditions become less favourable.
Still, regional banking systems show strong internal defences; high capitalisation levels, robust profitability and low reliance on wholesale funding will protect Southeast Asian banks as the economy changes.
But in the event that these stresses pressure household balance sheets or property prices, relatively subdued domestic inflation in most economies in the region give central banks room to loosen their monetary policy stances if necessary, says Moody’s.
Also, public balance sheets across Southeast Asia are relatively healthy when compared with global peers, which suggests that governments could initiate stimulus packages and spending programmes, if required, to support domestic demand, says Moody’s.
Overall, Moody’s thinks that although the household sectors in some of the region’s economies may experience pressure as a result of higher global interest rates, the risks are well contained and can be mitigated by government action.
