Ready capital raises risk of credit bubbles
SOUTHEAST Asian economies like the Philippines need to maintain vigilance over bank lending standards, particularly in consumer lending, as these loans stoke fears of a property bubble, a study said.
In the latest edition of “Economic Insight: South East Asia”, Europe-based Institute of Chartered Accountants in England and Wales (ICAEW) said a clear trend visible across Association of Southeast Asian Nation (Asean) economies is the growth of total lending to households, led by retail banks.
According to the ICAEW study, record-low interest rates and quantitative easing imposed by central banks in the Western world have propelled capital to Southeast Asia for higher returns.
This has allowed banks in Southeast Asia to borrow from global money markets at very low rates. This is enhanced by the post-crisis stagnation of some advanced economies and huge foreign direct investment flows to emerging economies, driving further cheap borrowing.
As a result, the study said lending is going to consumers across the region at an unprecedented rate. Part of the banks’ success is because of the shift from business lending to consumer lending.
“South East Asian banks are now among the most profitable in the world and the region is awash with capital. This is thanks partly to their ability to lend to their own large domestic markets combined with a rapid growth in the middle class, which is expected to expand further by between 16 percent and 28 percent over the next five years,” it said.
The ICAEW study pointed out that rapidly rising incomes and high population growth created fertile ground for investments in retail banking in Asean economies.
“In countries like Indonesia and the Philippines, penetration of financial products was extremely low and growing incomes made the prospect attractive. Traditionally high domestic consumption in the Philippines reinforced this,” the report explained.
The retail banking sector has facilitated a gradual increase in domestic consumption and helps to rebalance Asean economies between production for export and for domestic consumption, it added.
However, the study noted that during the run-up to the financial crisis, many suggested that United States and United Kingdom policymakers allowed credit growth to offset weak wage growth in lower earnings groups, artificially raising the standard of living. Ultimately, this raised the number of non-performing loans and contributed to the financial crisis.
Given this, the ICAEW study said Southeast Asian economies need to maintain vigilance over lending standards so that they heed the lessons from the financial crisis in the US and Europe in the late 2000s.
The study said it is important that economies with already high consumption rates, such as the Philippines, take care to avoid artificially raising the standard of living.
“Allowing credit growth to offset weak wage growth in lower earnings groups may ultimately raise the number of non-performing loans. And this, in turn, could result in increased risks of another financial crisis,” it said.
The ICAEW report “Economic Insight: South East Asia” is produced by the Centre for Economics and Business Research (Cebr), ICAEW’s partner and economic forecaster. Commissioned by ICAEW, the report provides its 142,000 members with a current snapshot of the region’s economic performance.
The report undertakes a quarterly review of Southeast Asian economies with a focus on Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.