KUALA LUMPUR, Nov 1 — Rising household debts in Asia and Malaysia have made financial observers anxious over a repeat of the 1997 Asian financial crisis, according to a blog post in the financial daily, Wall Street Journal (WSJ) today.
Observers also are noting the similarities between the current economic climate and 2007, just before the 2008 subprime crisis in the United States which forced foreclosures and the collapse of several financial institutions.
“There is no sign of stress with respect to defaults yet, but the high level of household debt coupled with the fact that growth has slowed sharply and rates have likely bottomed is indeed worrisome,” Taimur Baig, chief Asia economist at Deutsche Bank, told the WSJ.
This follows a report by Standards and Poor’s (S&P) Ratings Services this week titled “Rising Household Debt Could Weigh Down Asia’s Banks”, warning that rising mortgages will risk Asian banks’ creditworthiness.
“Rising household debt fuelled by rapid loan growth and easy monetary conditions could weaken the credit quality of banks in Asia,” said S&P credit analyst Ivan Tan during the report launch.
“Potential asset bubbles and imbalances are building up in some countries, and could put the banks at risk.”
According to the report, banks in Malaysia, besides Thailand, are among most vulnerable to any increase in household borrowing, due to their significant exposure to auto, personal, and unsecured loans which have a higher risk of default.
“As long as interest rates and unemployment rates remain low, we don’t expect any serious debt problems in Asia. But as and when they do go up or if economic growth slows, countries like Thailand will be at risk of higher credit losses,” Tan told the WSJ in an interview.
Malaysia has seen its growth slowing down this year, amid concerns by economists that consumption-driven economy is unsustainable, in addition to a lag in implementing structural reforms.
Its 2013 gross domestic product (GDP) growth outlook cut down by several agencies, including its own Bank Negara Malaysia (BNM), from 5.6 per cent to between 4.5 and 5 per cent due to a lacklustre first half performance.
The Asian Development Bank had similarly cut its outlook from 5.3 per cent to 4.3 per cent, owing to a dismal economy shared among neighbouring economies in Southeast Asia.
In March this year, several reports had warned that Malaysia risks being mired in a credit bubble which is looming in Asia’s emerging economies, together with Thailand, Singapore, China and Taiwan.
Malaysia’s household debt-to-GDP ratio rose from 75.8 per cent in 2010 to 76.6 per cent in 2011, and to 80.5 per cent in 2012, which is one of the highest in the region.
Although non-banking financial institutions and development financial institutions only account for 12 per cent of Malaysia’s total household credit, they are responsible for 57 per cent of personal financing credit, a figure that has risen significantly.
The comparative ease of obtaining personal loans has increased the percentage of personal financing over household debt from 16 per cent in 2011 to 17 per cent last year.
As a result, BNM had introduced in July three new measures to curb Malaysia’s rising household debt which included reducing the maximum tenure for personal loans to 10 years from 25, and 35 years for house loans. Offers for pre-approved personal loans have also been prohibited.
However in August, the central bank announced that Malaysia’s household debt-to-GDP ratio jumped by 3.3 per cent in the second quarter of the year, up from 82.9 per cent in the first quarter.
Even then, BNM did not sound any warning bells and BNM Governor Tan Sri Dr Zeti Akhtar Aziz insisted at the time that measures have already been put in place to promote sound and sustainable borrowings.
