When China unleashed the largest stimulus package in its history in response to the 2008 crisis and slowing export markets in the west, it came at a price. Today China is grappling with a bill that some economists say has driven total debt to gross domestic product past 200 per cent.
While China offers the most extreme example of using debt to fund growth, it is a pattern that has been repeated across Asia. Without exports, central banks turned on the taps, leading to a jump in household and corporate borrowing.
Now, as the US Federal Reserve considers a reversal of its ultra-loose monetary policy, the region faces a new challenge: coping with life after debt. And as investors gauge the impact of that transition, the ghosts of the 1997-98 Asian financial crisis have been reawakened.
“All this QE [quantitative easing] money has lead to a massive credit inflation bubble in Asia,” said Kevin Lai, chief regional economist at Daiwa Securities. “The crime has been committed, we just have to deal with the aftermath. During that process there will be a lot of damage … It’s like a margin call. Households will need to sell their assets. There will be a lot of wealth destruction.”
Echoes of the Asian financial crisis are easy enough to hear. Credit growth since 2008 has been rapid, leading to a run-up in house prices, high growth rates and corporate mega-deals. In April, Thailand recorded both its biggest ever domestic takeover and its largest equity listing, according to Dealogic data.
But as the tide of cheap money from overseas rolls back from emerging economies across the region, analysts warn that Asia could be at the start of a series of currency and credit crises, not unlike the experience of the 1990s.
Most of the focus has so far been on India and Indonesia, the two countries in Asia with the biggest current account deficits, making them the most reliant on foreign capital to make ends meet. Both have seen their currencies and their equity markets plunge in the past week.
But the risks of contagion across the region are beginning to rise, say economists, made worse by the slowdown in China, Asia’s biggest growth engine.
In Thailand, which slipped into technical recession in the second quarter, household debt to GDP has risen from 55 per cent in 2009 to almost 80 per cent today. Total debt to GDP now stands at 180 per cent, according to data compiled by HSBC.
Oil-rich Malaysia has seen a similar increase in debt levels, helping to power consumption and housing booms. But poor trade figures have raised the prospect of it slipping into deficit this year, after a decade of running surpluses.
And last week Indonesia reported a sharp widening of its current account deficit, its worst since 1996, thanks mainly to a fall in the value of its commodity exports.
“We’re going into a period of stagnation in growth over the next couple of years,” said Fred Neumann, chief Asia economist at HSBC. “It was a sweet spot and that’s now coming to an end. Asian economies had an easy ride because they bought themselves growth through leverage. They should have used that time to carry out structural reforms. Instead they’ve used the cheap money and enjoyed the high growth rates. That opportunity has now gone.”
The falling growth rates across Asia also serve as evidence of a deterioration in productivity. Credit intensity – a measure of how much debt is needed to create a single unit of economic growth – has risen sharply almost everywhere. In Hong Kong, it has almost tripled since 2007, while in Singapore it has jumped more than fourfold.
The choice is either you protect your currency or you protect domestic growth. You can only do one or the other
“A lot of this new credit is going into housing and property across the region. That area is not the most productive, it doesn’t bring new value into the system,” says Jimmy Koh, head of economic-treasury research at United Overseas Bank in Singapore.
For policy makers, the rise in credit and fall in growth leaves little room to move. Indonesia chose to raise rates in an attempt to prevent a run on the currency, while India has introduced measures to support the rupee. So far, neither tack has produced the desired results.
“The choice is either you protect your currency or you protect domestic growth. You can only do one or the other. There is no easy way out,” Mr Lai said.
Though the fears may be familiar, much has changed in the past 15 years. The debt burden in 1997 fell mostly on large, overstretched companies, rather than the households and small enterprises, currently enjoying rising incomes and healthy profits.
Asia’s bond markets have also seen major positive development, with much more long-term and local currency borrowing, rather than the short duration dollar credit of the past.
And the region’s institutions – from sovereign wealth funds to central banks – provide local financial systems with far stronger buffers, helped by the fact that most Asian economies save more than they spend.
But that does not mean some fresh trauma is impossible. As Mr Neumann puts it, “every crisis arrives in a different guise.”
Additional reporting by Jeremy Grant in Singapore.