The continued rise in the levels of household debt held by Southeast Asian banks, which are now under pressure due to rising interest rates, may lead to a deterioration in consumer confidence that could lead to slower growth in the region.
The Philippines, in particular, was among the most vulnerable in the region, Moody’s Investor Service said. Although the level of household debt in the country was one of the lowest in the region, the contribution of consumer spending to the real economy was the highest.
As interest rates rise due to the Federal Reserve’s taper, consumers would see higher interest rates for household loans, putting pressure on their ability to repay obligations. The result, Moody’s said, would be a depreciation of real estate prices.
“Such a development would undermine consumer confidence and, by potentially reducing collateral values, further restrict the availability of credit,” Moody’s said in a report this week.
“Asset quality in other areas of consumer finance—such as automobile loans, credit cards and personal loans—would come under pressure,” it added.
The rapid expansion of consumer credit across Southeast Asia in recent years has created several pockets of high household leverage, Moody’s said. The credit rating firm said this would pose a risk to economic growth and asset quality in the region as global liquidity conditions turn less accommodative next year.
As the global credit cycle turns, Moody’s said elevated household indebtedness would have a number of economic and financial spillover effects across Southeast Asia, including slower property price appreciation and a slowdown in private consumption growth.
More than two-thirds of the Philippine economy is made up of domestic consumption, which is driven by remittances from migrant workers and the country’s strong services sector. Moody’s notes that while levels of household debt in other countries have risen faster than that in the Philippines, the contribution of consumption to those countries’ economies was significantly smaller.
Conversely, with household debt in the Philippines being significantly lower than elsewhere in the region, the risk of banks coming under pressure was lower.
At the end of June, the Philippine banking system was holding P803.26 billion in consumer loans, up 32 percent year-on-year. About P40.8 billion in consumer loans was at risk of default at the end of June, while banks’ loan loss reserves reached P27.21 billion.
Despite the rapid year-on-year increase, consumer loans still made up less than a tenth of the industry’s total assets, which totaled P10.27 billion at the end of the first semester.
“The headwinds surrounding the relatively high level of household debt in Singapore are mitigated by the low share of private consumption,” Moody’s said.
Fortunately, banks in the region were relatively well-capitalized and profitable. Moody’s said banks in the region had also responded well to regulatory curbs to household lending. Banks have been willing to tighten their lending criteria to avoid excessive risk taking.
Results of the BSP’s most recent senior loan officers survey showed banks had tightened credit standards to consumers for the fourth-consecutive quarter amid rising risk aversion rising interest rates, which puts a squeeze on profitability.
Fiscal authorities in the region also have enough room to hike spending to compensate for slower private sector demand.
The general government debt averaged 39 percent across Southeast Asian economies in 2014, versus a global average of near 50 percent.