Coface risk assessments

Emerging Asia & growing risks linked to household debt

Soaring consumption due to expansion of the Middle Class

Asian economies have weathered the double blow of the global crisis of 2008-2009 and that of the sovereign debt of the Eurozone, due notably to dynamic household consumption and growth in the middle class. For example, since 1995 consumption per capita has almost tripled in China and has more than doubled in India, illustrating the catch-up underway in the least developed countries. This catch-up, mostly incomplete for now, will continue in the long term and will be conveyed by the expansion of the middle class in Asia. As a consequence of sustained GDP growth and public policies to support consumption, household income is rising. The ageing population and rapid urbanisation are also contributing to this development.

Three key sectors will continue to fully benefit from the increased consumption of the middle class in the coming years:
• Automotive, due to the growth in demand in Asia, with auto sales having a compound annual growth rate of 19.5% between 2002 and 2012.
• High-end consumer goods, buoyed by the Chinese preference for luxury brands. It is forecasted that the share of Chinese spending on high-end bags, shoes, watches, jewellery, and ready-to-wear clothing will be higher than 1/3 of the world’s total spending on such items by 2015.
• Tourism due to the large numbers of Chinese travelling to other countries in the region. For example, Hong Kong’s tourism enjoys much of the benefit from the economic growth of China. Between 1997 and 2012, annual inbound visitors from mainland China increased from less than 2.4 million to 35 million.

Malaysia, South Korea, Singapore and Thailand: household debt similar to that of the United States at the time of the subprime crisis

If the boom in consumption in emerging Asia reflects the economic development of the region, it is also linked to easier access to bank credit. Hence, excessive household debt in some countries could adversely affect economic activity in the medium term through a deterioration of the current account balance, making some countries more vulnerable to volatile external funding and therefore to the risk of capital outflows and a sharp medium term exchange rate depreciation. Four countries are most at risk. In 2012, the ratio of household debt to disposable income reached 194% in Malaysia, 166% in South Korea, 134% in Singapore and 112% in Thailand, whereas it was around 130% in the United States in 2008, that is to say at the start of the subprime crisis. The result has been a household debt service higher than in the United States in 2008 and in Spain in 2012 (where it is largely responsible for the deep recession).

Julien Marcilly, Head of Country Risk at Coface, commented: "The parallels with the situation of US households at the time of the 2008 crisis don’t necessarily mean that a crisis of similar magnitude is imminent in emerging Asia. But moderation in household consumption will be needed over the coming years. To address the risk that household debt poses to the economy and the banking sector, local authorities must take preventive measures, such as tighter monetary policies and stricter prudential rules."

Country and sector risk assessment is one of Coface’s key areas of expertise and helps companies trading internationally to secure their transactions.