Rise in domestic debt places Malaysia at risk of crisis, economists warn

By Ida Lim

December 24, 2012

Kuala Lumpur skyline at dusk. WSJ reported that Malaysia had one of the higher figures of debt levels in the region, with the country’s credit-to-GDP ratio this June rising to 117 per cent from 96 per cent in late 2007. – Reuters pic

KUALA LUMPUR, Dec 24 – Economists warn that a rise in domestic debt that has been keeping Asia’s economy strong could place the region, which includes Malaysia, at risk of a major crisis, the Wall Street Journal (WSJ) reported.

The WSJ noted the great increase in the number of loans being taken by Asian businesses and individuals due to the low interest rates offered by banks.

But Frederic Neumann, co-head of Asian economic research at HSBC, warned that the Asia could be at the brink of a major debt crisis, saying: “I believe we are at the beginning of a major debt cycle in Asia.”

“We are certainly seeing the early symptoms of a debt bubble emerging, and I think it’s worth keeping a close eye on,” he told the international business paper last Friday.

The WSJ reported that Asia’s debt levels had jumped far greater than the troubled Euro zone and the US.

Asia’s credit-to-GDP ratio shot up to 104 per cent this June from 82 per cent in December 2007, while the Euro Zone’s was a slower rise of 131 per cent from 123 per cent and the US’ ratio had went down by one per cent to 62 per cent.

“If you look at the speed of increase in credit growth in virtually all Asian countries, if that’s maintained, in two to three years the situation’s going to come to a head.

“Northeast Asia, Singapore, Malaysia and Thailand all are at risk in this regard,” Neumann said.

WSJ reported that Malaysia had one of the higher figures of debt levels in the region, with the country’s credit-to-GDP ratio this June rising to 117 per cent from 96 per cent in late 2007.

Hong Kong and Singapore had a high ratio growth in the same five-year period, with the former’s ratio climbing to 275 per cent from 183 per cent, while the latter went up to 137 per cent from 87 per cent. Indonesia only grew to 33 per cent from 25 per cent.

The International Monetary Fund reportedly said that an increase in the credit-to-GDP ratio of above five percentage points a year, coupled with a rise in equities prices of at least 15 per cent, would show a 20 per cent chance for a crisis to happen within the coming two years.

But governments in Asia, including Putrajaya, have moved to cut down on debts within the country.

Putrajaya has tightened regulations for housing loans and discouraged the chalking up of huge credit card debts.

According to the WSJ, the World Bank had warned Asian countries with high jumps in their debt levels to be alert and act to cut down on risks.

Malaysia had been hit with a financial crisis along with the rest of Asia in 1997.

Although Asian economies have recovered and picked up growth since then, governments are trying their best to avoid a repeat of the painful episode.

Like other Asian countries, Malaysia now continues to rely on increasing domestic demand to drive its economy, which grew by a strong 5.2 per cent in the third quarter this year, despite weaker export figures.

Daniel Martin echoed Neumann’s worry, saying that letting credit growth drive the economies could be risky.

“I think there’s now a danger, the way the global economy is, that increasingly Asia comes to rely on loose monetary policy and rapid credit growth to compensate for weak exports,” the economist for Asia at Capital Economics was quoted saying by WSJ.