>Do Asian countries still have a risky debt structure? (NATIXIS)

We propose in this study to analyze the debt structure trends of the institutional sectors of six emerging economies in Asia and the risks related to them.

The large proportion of contracted external debt (regardless of the institutional sector) had in fact been identified as one of the main sources of external vulnerability of these economies at the time of the Asian crisis in 1997.

We shall show that in the 2000s the debt structure balanced gradually towards more stable and less risky domestic debt due primarily to the reduced exposure to foreign exchange risk. However, there are still persistent signs of financial vulnerability. First for certain countries, the balance has not been restored in all institutional sectors (public sector and non financial private sector in the Philippines; non financial private sector in Indonesia), second, new financial vulnerabilities have appeared as attested by the high debt levels (particularly concerning the non financial private sector in South Korea), which raises the issue of their medium term sustainability.

We propose in the context of this study to analyze the debt structure of six emerging economies in Asia (South Korea, India, Indonesia, Malaysia, Philippines and Thailand) by adopting both a time-factor and transversal viewpoint.

We were particularly interested in the debt of three institutional sectors: the government sector, the banking sector and the non financial private sector (households and corporate) over a period starting from the middle of the 1990s (pre-Asian crisis) to today.

The findings of this study can be summarized in three main points:

- Public sector:
• On the domestic level, India seems to show relative vulnerability linked to the long-term sustainability of public debt. This sustainability could be reassessed if the budget deficit were to worsen,

• On the external level, only the Filipino public sector seems to be relatively vulnerable due to the volatility of capital flows and the foreign exchange rate, caused by the non negligible proportion of external liabilities contracted with foreign private creditors. The other economies present no particular vulnerability linked to the public debt structure.

- Banking sector:
• On one hand, this sector’s proportion of external liabilities fell for all countries over the study period and on the other hand, the economies of the zone no longer have since the beginning of the 2000s, external currency mismatches on the balance sheet of these sectors. As a result, the economies of the sample present no specific vulnerability linked to the external debt structure of the banking sector.

- Non-financial private sector:
• On the domestic level, South Korea presents relative vulnerability with respect to the heavy debt burden of households and corporate which exposes them in the short-term to a greater sensibility of their net worth to an interest rate or income shock. Against a background of relatively limp global recovery, the high debt level strains also the potential of economic recovery given the limited possibilities of using debt to leverage growth. In the long term, there is also the issue of the sustainability of corporate debt and the solvency of this sector for which an adjustment would entail reduced investment.

• On the external level, Indonesia and the Philippines seem to be the economies that require watching due first to the non negligible proportion of externally-contracted liabilities, although these have been on a downward trend since 2001 (especially in Indonesia). A depreciation of the national currency would threaten the solvency of these sectors by increasing the burden of the liabilities owed.

To read the full report: DEBT STRUCTURE