Despite the high levels of household debt that are seen in a number of Southeast Asian countries that pose risks for private consumption growth and banks’ asset quality, the debt levels are still manageable, Moody’s Investors Service said in a statement on Monday.
“While elevated household debt could place refinancing pressure on mortgage and consumer credit as the global credit cycle gradually tightens, Southeast Asian bank systems are largely sound and can withstand significant asset deterioration,” Rahul Ghosh, a Moody’s Vice President and Senior Research Analyst, said in the statement.
“In addition, if these stresses begin to affect the wider economy, regional governments can implement counter-cyclical policies to support domestic demand,” Ghosh added.
Capital flows into Southeast Asia economies will moderate as the U.S. Fed is likely to raise interest rates in 2015, Moody’s said.
In Southeast Asia, Malaysia and Thailand are the most vulnerable to rising interest rates due to their high levels of overall indebtedness alongside a rapid rate of credit accumulation seen over recent years, the statement said.
In 2013, household debt as a share of GDP for Malaysia was at 87% and 82% in Thailand, the Moody’s statement said.
Household debt relative to income levels in Malaysia and Thailand suggests that loan-servicing capacity in both countries will likely become problematic as credit conditions worsen, the ratings agency said.
However, despite these risks, regional banking systems show that there are strong internal defences; high capitalization levels, robust profitability, and low reliance on wholesale funding which will protect Southeast Asian banks as the economy changes, the statement said.
Moody’s also noted that public balance sheets across Southeast Asia were in good shape in comparison to global peers, which suggests that – if needed – governments could initiate stimulus packages and spending programs to support domestic demand, the statement said.
Moody’s said that it believes that despite some pressure that may be seen across households in some of the Southeast Asian economies due to higher global interest rates, that the risks are “well contained and can be mitigated by government action.”
Source: Moody’s
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