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High debt level will hurt debt service ability

Within the Asean region, the Malaysia and Thailand banking systems are the most exposed to increased pressure in the household segment when rates rise, said Moody's Investors Service.

In the report "Rising Household Leverage Poses Risks to ASEAN Banks as the Economic Cycle Shifts", Moody’s said the ability of households in these countries to service their debt in a rising interest-rate environment will be negatively affected by consumers' high leverage at a time when the housing market in Malaysia may be peaking and Thailand faces elevated political risks.

The report coincided with the possibility that the United States may raise the interest rate on the back of economic recovery. This will draw back liquidity from other countries, hence driving the borrowing costs.

The University of Thai Chamber of Commerce’s survey released today showed that average household debt at the end of June stood at Bt219,158. The survey also showed that 75 per cent of 1,200 samples said they are indebted, compared to 65 per cent in the previous year.

Household debt has risen significantly in Asean in the past several years, with growth in

bank loans to households outpacing loan growth to other borrowers. Household borrowers in Thailand, Malaysia, and Singapore (Aaa stable) have also increased

their borrowings from government-affiliated or non-bank financial institutions. Household

leverage as a percentage of gross domestic product (GDP) is at historically high levels in Malaysia (87 per cent at end-2013) and Thailand (82 per cent at end-2013), and close to its five-year high in Singapore (75 per cent at end-2013). Although household debt has also risen significantly in Indonesia (Baa3 stable) and the Philippines (Baa3 positive), the growth in these countries is from a low base. Household debt to GDP was 7 per cent in Indonesia and 6 per cent in the Philippines at end-2013.

"If interest rates were to rise sharply, Malaysian and Singaporean household borrowers would face a more immediate increase in their repayment burden than borrowers in Thailand. This is because most household borrowings in Malaysia and Singapore are at variable rates, meaning that debt repayment burdens will increase in line with an interest rate hike. In contrast, the burden on Thai household borrowers from interest rate increases is lightened by the lengthening of mortgage tenors in Thailand that keeps periodic repayment amounts unchanged when rates go up," it said.

Among the Asean economies, Thailand remains particularly vulnerable to a sharp change in investor and consumer sentiment. Although Thailand has proved resilient during past periods of political upheaval, it remains vulnerable to the uncertainty caused by its still unresolved political situation. In contrast, economic growth is likely to remain robust in Malaysia even as the government proceeds with fiscal consolidation efforts, while the Singapore economy, which is tightly linked to regional trade trends, will remain stable for as long as a majority of the regional economies are stable.

In Indonesia, Malaysia, the Philippines, Singapore, and Thailand - the five original members of Asean which together comprise close to 90 per cent of the organisation's total GDP - total household loans have grown at a compound annual growth rate of 16 per cent since the 2008-09 global financial crisis, outpacing non-household loan growth of 14 per cent.

In contrast, household indebtedness remains relatively low in Indonesia and the Philippines compared with the other Asean nations. This, in turn, reflects lower levels of economic development in the Philippines and Indonesia relative to Thailand, Malaysia, and Singapore.


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