Household debt high in SE Asia, but manageable: Moody's

Household debt as a share of gross domestic product (GDP) was high for both, at 87 per cent for Malaysia, and 82 per cent for Thailand, at the end of 

2013, says Moody's.

With the US Federal Reserve likely to raise rates in 2015, capital inflows into Southeast Asia will moderate, says Moody's. Rapid growth in consumer credit has led to several pockets of high household leverage. 

"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.

A research presented at the recent BOT Symposium 2014 showed that household debt acceleration in the past years is not yet a risk factor to the Thai financial stability in the short term, given that new loans are concentrated on the upper middle-income earners. 

Yet, on the macro-economic front, it could significantly dent household consumption in the near future, particularly among households whose debt accounts for over 40 per cent of income. This group will be the most sensitive to an increase in interest rates.

According to Moody's, household debt relative to income levels in Malaysia and Thailand is also elevated, suggesting that debt-servicing capacity in both is likely to become problematic as credit conditions become less favorable.

Still, it said that across Southeast Asia, the banking systems remain strong with high capital and profits. Meanwhile, public balance sheets across Southeast Asia are relatively healthy when compared to global peers, which suggests that governments could initiate stimulus packages and spending programs, if required, to support domestic demand, said Moody's. It believed that although the household sector 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.