Growing risks linked to household debt in Malaysia, South Korea, Singapore and Thailand, Coface warns

Increased access to bank credit is leading to excessive amounts of household debt being racked up in many parts of Asia, according to Coface.

The credit-insurance provider has warned that this could adversely affect economic activity in the medium term, and that four countries were most at risk. In 2012, the ratio of household debt to disposable income reached 194% in Malaysia, 166% in South Korea, 134% in Singapore and 112% in Thailand.

Rocky Tung (pictured), who was appointed as Coface’s economist for the Asia-Pacific region last month, said that excessive debt caused by explosive credit expansion could make Asian countries more vulnerable in the medium term, with volatile external financing leading to capital outflows. “It also may result in sudden depreciations in the exchange rate, like those observed during the summer of 2013,” Tung said.

Coface has also revised its country risk assessment for Thailand, where growth has decelerated sharply this year. It is expected to remain constrained in 2014 by the country’s high household debt, which is 80% of GDP.

Hong Kong-based Tung said that the effects of previous stimulus measures were wearing off, and that Thailand would continue to suffer from sluggish exports, particularly related to its dependence on China.

Head of country risk at Coface, Julien Marcilly, said that household income in Asia was rising as a consequence of sustained GDP growth and public policies to support consumption, and that ageing populations and rapid urbanisation were also contributing factors. “The parallels with the situation of US households at the time of the 2008 crisis don’t necessarily mean that a crisis of similar magnitude is imminent in emerging Asia,” Marcilly said. “But moderation in household consumption will be needed over the coming years.

“To address the risk that over-indebtedness of households poses to the economy and the banking sector, local authorities must take preventive measures, such as tighter monetary policies and stricter prudential rules.”