Like Thailand, Philippine officials will likely continue to stubbornly contradict publicly on the risks of bubbles, yet as I recently pointed out, recent events in Cyprus only reinforces the perspective of how regulators can hardly see or anticipate bubbles until fait accompli or until the ex-post materialization of the advent of a crisis[1].
And it would seem that more from the mainstream are becoming aware of elevated risks of Asia’s credit expansion. (yes, I am not alone)
The Royal Bank of Scotland (RBS) practically notices all the symptoms I have been elaborating as effects or symptoms of bubbles.
They note that bank deposits have not kept the pace with rate of credit growth. They also noticed that the focus on domestic consumption coincides with rising credit levels and the loosening of credit conditions (left window). Savings have also been in a conspicuous decline.
Remember consumption is a function of income. Outside income, more consumption can only be attained by virtue of borrowing and by running down of savings. Borrowing represents the frontloading of consumption. Expanded consumption today eventually leads to lesser consumption tomorrow as the borrowers would have to pay back on the interest and principal of debts.
As I previously noted[2]
My explanation revolved around examining the 3 ways people to consume; productivity growth (which is the sound or sustainable way) and or by the running down of savings stock and or through acquiring debt (the latter two are unsustainable).
So the decline in deposits and savings as credit expands are signs of capital consumption.
The RBS also observed that the ballooning of credit have come amidst the backdrop of falling labor productivity while the region’s balance of payments had rapidly been deteriorating.
Declining savings and the diversion of household expenditure towards debt financed consumption goods leads to capital consumption, thus the decline in productivity.
Artificially suppressed interest rates, which penalizes savers and encourage speculation in the financial markets and other unproductive uses of capital, mainly through the concentration of speculative investments or gambles on capital intensive projects, e.g. property, shopping mall, casinos, are symptoms of malinvestments. So instead of promoting productive investments, low interest rates serve as another source of productivity losses.
The RBS equally notes that India, Indonesia and Thailand have become balance of payment ‘deficit’ countries whereas Malaysia’s surplus has been sharply declining. The regions banks’ loan-deposit ratios have likewise substantially increased to uncomfortable levels (right window).
When nations spend more than they produce, then such deficits occur. And deficits would then need to be financed by foreigners or as I previously noted “would need to be offset by capital accounts or increasing foreign claims on local assets”[3].
And with more countries posting deficits, then the increased competition for savings of other nations will translate to increased pressure for higher domestic interest rates. Yet greater dependence on foreigners increases the risks of a sudden stop or of a slowdown or reversal of capital flows.
On the same plane, when domestic spending is financed by domestic debt then deficits grow along with rising local debt levels.
The deterioration of real savings or wealth generating activities and the expansion of bubble activities only increases the risks of a disorderly adjustment (bubble bust) which may be triggered by high interest rates or by interventions to reverse the untenable policies or by sudden stops or by plain unsustainable arrangements or even a combination of these.
The RBS also comments that household debt ratios particularly in Hong Kong Malaysia and Singapore have increasingly transformed into a fragile state, accounting for over 65% of GDP. Worst is that household wealth has nearly been concentrated in property, which makes the region’s wealth highly vulnerable to higher interest rates and a decline in property prices.
Overreliance on debt which has been used for unproductive and consumption activities only increases people’s sensitivity and susceptibility towards upward changes in interest rates that are likely to affect asset prices and economic performance.
This is known as the bubble cycle.
The RBS as quoted by the Reuter’s Sujata Rao[4],
What is however worrying is the pace of credit growth. …The combination of rapid credit disbursals and more importantly, the on-going divergence between credit disbursals and GDP growth implies that the system is becoming more vulnerable to income and interest rate shocks.
Again while such imbalances may not have reached a tipping point or the critical mass yet and which may not likely impact the region over the interim, everything will depend on the “pace of credit growth”.
And a manic phase will likely goad more debt acquisition in order to chase yields.
[1] see The Anatomy of the Cyprus’ Bubble Cycle March 24, 2013
[2] see Shopping Mall Bubble: The Quibble Over Statistics January 29, 2013
[3] See E-Vat 15%: Possible Consequence from Current Quasi Boom Policies December 10, 2012
[4] Sujata Rao Asia’s credit explosion, Global Investing Reuters.com March 22, 2013
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