The rise of bank and non-bank credit to Asian firms has been one of the big themes in the regional economy in recent years.
An International Monetary Fund (IMF) report today suggests the rise in leverage has been modest but warns the longer-term impact needs to be watched.
There’s been an increase in bank credit-to-GDP ratios in nearly all economies in the region particularly in the financial centres of Hong Kong and Singapore.
In an article titled, ‘Corporate Leverage in Asia: A Fault Line?’, the IMF notes the growth of credit in China and Vietnam, and how corporate bonds are being issued by companies across the region with volumes at levels higher than before the global financial crisis.
The IMF says:
“This reﬂects both the forces of financial globalisation, as larger firms have successfully issued abroad, and the low global interest rate environment, which has led to the search for yield by global investors and a compression in corporate risk premiums across the board.”
As global interest rates start to rise, corporate vulnerabilities concealed by the easy credit environment may come to the fore.
While corporate profitability has remained relatively robust in Asia, reflecting a combination of strong growth and relatively low borrowing costs, a rapid rise in corporate borrowing has increased leverage.
The IMF says:
“This has raised questions about the long-term solvency of the corporate sector, particularly in economies where a significant share of corporate debt is owed by companies with relatively low liquidity and low profitability (in relation to their debt service).
“Nevertheless, so far, the rise in aggregate leverage has been modest and does not ring alarm bells.”
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