Low interest rates are a saving grace for debt-riddled Asian economies

Photo: Getty/Spencer Platt

Debt levels in the Asia-Pacific region continue to rise, but for the time being Asian economies are holding up well.

According to HSBC analysts Frederic Neumann and Abanti Bhaumik, there’s a few reasons for that. The pair have run some numbers on regional debt levels in their weekly post on the Asian economy.

With an eye towards China, they said that while debt is rising, Asian economies are subject to more stringent regulations than in past years, while liquidity is also higher and foreign exchange buffers are still in place.

Most importantly though, interest rates remain low. They note that even with the US Federal Reserve raising interest rates three times over the past six months, US government bond yields have actually decreased and funding costs in Asia remain low.

Despite that, most would agree that interest rates won’t stay low forever. It’s probably worth thinking about a prospective rise in funding costs and what that would mean for the Asian economic landscape.

So with that, here’s Neumann and Bhaumik’s chart of the week:

It shows the path of non-financial sector debt for the US and China since 1999. It also shows debt servicing costs (the sum of principal and interest repayments), which are affected by the level of interest rates.

Although US debt levels are currently at the same level as they were in early 2000’s, debt servicing costs are lower in the current low interest rate environment.

The same effect can been seen with China, where Chinese debt has grown significantly faster since March 2009 but debt servicing costs have remained almost constant over the last three years.

Next is HSBC’s summary of the debt service ratio for the Asia-Pacific region. In effect, it summarises the percentage of total income that would be required to service each country’s debt:

“Hong Kong tops the ranking, but that’s partly because it is a regional financial centre and therefore not necessarily comparable to others,” the two analysts said.

The columns in black are added for context to show the peak debt services ratio for Spain, the UK and US in the lead-up to the global financial crisis.

As you can see, Australia’s debt services ratio is at a historically high level and currently ranks behind Honk Kong with a debt service ratio of 21%.

Obviously, future movements in interest rates are impossible to predict but the HSBC analysts are throwing out a reminder.

If a leading central bank like the US Federal Reserve is in the process of normalising monetary policy, rates markets may eventually follow suit and that could leave countries with high debt like China and Australia exposed.

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