Build-up in leverage poses varying risks for Asia Pacific sovereigns: Moody's
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E-mail Xinhua, April 26, 2016
Moody's Investors Service said in a report on Tuesday that the increase in leverage across Asia Pacific over the last five years could weigh on sovereign credit quality.
It also said the sovereign risks could materialize either directly, where the debt increase has been concentrated in the public sector, or indirectly, where the rise in private sector leverage has been rapid.
Moody's analysis was contained in its just-released report entitled "Sovereigns -- Asia Pacific: High Public, Private Sector Leverage Poses Credit Risks Across the Region."
The report highlighted that in addition to the pace of increase in and level of debt, several other factors determine risks to sovereign credit profiles.
It noted that macroeconomic trends, asset buffers, income profiles and policy responses can all mitigate or exacerbate the credit impact that high leverage can have.
The report identifies the sovereigns that face risks from an accumulation of debt, and the source, whether via government, state-owned enterprise, corporate, household or bank balance sheets.
According to the report, government debt levels are elevated and pose a sovereign credit constraint for India, Japan, Malaysia, Pakistan and Sri Lanka. But government leverage is also climbing rapidly in several other countries, curbing room to ease fiscal policy in future. Elsewhere, government borrowing is at moderate levels, but reliance on foreign currency and external debt is a vulnerability.
State-owned enterprise (SOE) liabilities are large in China, and smaller but still material in South Korea, Malaysia, Sri Lanka and Vietnam. While only a fraction of total SOE liabilities may crystallize, sovereigns' balance sheets would be affected as a result.
In terms of private corporate debt, Moody's said it has risen significantly in China's Hong Kong and Singapore, reflecting their status as international financial centers. While total corporate debt is modest relative to GDP in Indonesia, Moody's said a previous build-up in private sector external debt exposes companies in the country to currency fluctuations.
Moody's pointed out that banking sector risks in the Asia Pacific are mainly related to corporate credit profiles. In Vietnam and Mongolia, banks are working through legacy problem assets. In Bangladesh and India, impaired loans at state-owned banks expose the governments to risk.
As for households, Moody's said that leverage is high relative to GDP in Australia, China's Hong Kong, South Korea, Malaysia, New Zealand, Singapore and Thailand. In most cases, household financial assets are also substantial, alleviating credit risks to banks. But financial volatility can cause asset values to fall, just as household leverage constraints start to bite.
Moreover, curbed consumption typically exacerbates the impact of negative economic shocks when household leverage is elevated. In such scenarios, affected sovereigns would face a much weaker growth environment, it added. Endit
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