20140224-Morgan Stanley-Asia’s Debt Indulgence

Asia Pacific Economics
Asia Insight: Asia’s Debt Indulgence （69 pages）
(1) Aggregate Trend in Leverage 6
(2) Main Drivers of Leverage Buildup 11
(3) Productivity of Incremental Debt 14
(4) Which Balance Sheet Is Leveraging in Asia ex Japan? 24
(4a) Household Debt 26
(4b) Corporate Debt 28
(4c) Government Debt 30
(4d) External Debt 32
(5) Implications and Outlook 37
(6) Country Snapshot 50
(7) Appendix 63

AXJ’s leverage levels have picked up sharply over the past six years....Leverage in AXJ is relatively over-extended when evaluated in the context of the region’s per capita incomes. Moreover, the increase in leverage over the past six years has been
unproductively employed and has resulted in a loss in productivity, which is reflected in a rising incremental capital output for the region as a whole.

…with two key implications: Firstly, we believe that the pace of debt growth will slow in the face of declining excess saving, elevated loan-to-deposit ratios, rising real rates, an unfolding credit cycle, and hesitation on the policy makers’ front to aggressively push leverage due to visible signs of past misallocation of financial resources. Second, policy makers will find it more
challenging to manage the debt dynamics. The rising age dependency in many countries in the region and the current disinflationary trends will mean that nominal GDP growth will likely be weaker, which in turn imply that managing the debt dynamics (debt to GDP) will be more challenging than before.

Outlook: Further downside risks to medium-term growth outlook for the region: High Leverage + Weakening Demographics + Weak Productivity Growth at the starting point brings downside risks to the region’s medium-term growth outlook. Therefore, we classify the region into three groups, based on where we see the risks to consensus medium-term growth forecasts:

Downside Risks: China, Hong Kong, Singapore
Moderate Downside Risks: Korea, Taiwan, Malaysia, Thailand
Neutral: India, Indonesia

Bottom Line: Considering the headwinds to growth from deteriorating demographic trends and potentially weaker support from leverage, a revival in productivity dynamic will be key to improving the region’s growth outlook.


版主评论：The report is excellent! I strongly agree that leverage, demographics, and productivity are the three keys in driving the region's growth outlook. Unfortunately, China has low scores in all of the three aspects, and thus I do not have an optimistic expectation on its medium-term growth.

It is interesting to find that China, Hong Kong, and Singapore which are facing downside risks have the highest housing prices in the region, reflecting fast credit growth and a threaten to the real economy. Also, for the neutral outlook of India and Indonesia, I think it is because they suffered from capital outflow due to Fed tapering already since last May, which drove down the fx rates a lot. This is positive for future growth as long as their central banks can maintain the credibility and manage the policies prudently.