Asia leverage uncovered – finding the balance: growth potential vs solvency stress

Standard Chartered has today released a comprehensive report examining leverage across countries and sectors in Asia. It is a collaborative piece from the Bank’s macroeconomists and bank equities analysts, which extends beyond the standard ‘total debt-to-GDP’ analysis to take a more granular view of leverage and solvency across corporate, household and government sectors in Asia. It concludes that current leverage levels are broadly manageable, with areas of concern and pockets of opportunity – areas where leverage remains low.

Key features of the report are:

• Unprecedented approach to systemic credit risk. This report explores leverage and solvency across Asia using an analytic framework unachievable six months ago. It synthesises a new Bank for International Settlements database with bottom-up corporate credit metrics and other information into a map of leverage and solvency at the sector (household, corporate and government) level. It is now possible to combine borrowings, borrower cash flows, interest rates and repayment tenor into new solvency metrics, most notably debt service ratios.
• Looking only at Asia’s manageable aggregate leverage misses pockets of opportunity and risk in individual countries and sectors. China’s corporate sector – large, with high leverage and weak cash flow – remains an issue. Low household leverage in China, India and Indonesia suggests capacity for borrowing, consumption and rebalancing. Korea’s high leverage spans the economy and continues to drag on growth. India’s stresses are confined to listed corporates, a relatively narrow slice of total credit. ASEAN flashes isolated warnings – household leverage in Malaysia and rapid growth in Thailand.
• Challenges and opportunities. In addition to identifying challenges or slower growth to come, the report assesses areas of future strength in the region and examines the sectors that are areas of concern, those with moderate risks, and those with room for further leverage. We conduct this analysis just as Asia ex-Japan’s overall credit-to-GDP ratio reaches a similar level to the world average.

David Mann, Regional Head of Research, Asia, Standard Chartered Bank, commented: “Our study shows that while there are pockets of emerging concern, Asia’s fundamentals remain robust. Strong government and household balance sheets across most of the region provide sufficient flexibility to counter inevitable bumps as the economic cycle turns. Learning from Asia’s financial crisis in 1997-98, governments in the region have been using macro-prudential policies since before they were considered to be best practice. We see scope for several Asian economies to increase borrowing to maximise their growth potential.”

Download the report (PDF) examining leverage across Asia.
 

For further information please contact:

Shaun Gamble
Senior Manager, External Communications
Tel: +44 20 7885 5934
E-mail: Shaun.Gamble@sc.com