High or rapidly increasing leverage, together with mounting exposure to China, will constrain upward rating momentum for banks in Asia-Pacific (APAC). It could even lead to downgrades should China's economy slow more sharply than expected and weaknesses in its banking system become more widespread.
Fitch estimates that private sector credit in APAC will reach 148% of GDP by end-2012, approaching the peak of 150% in 1998-1999. The credit/GDP ratio is converging for Asian emerging markets (143%) and Asian developed
markets (156%), marking a high for the former.
Within emerging markets, leverage trends are mixed. Vietnam's credit/GDP ratio has more than doubled since 1997, while Indonesia, Thailand, the Philippines and Malaysia have deleveraged substantially.
Fitch expects leverage in China will continue to rise as credit is employed to underpin the economy. Strong credit growth in China, and to a lesser extent India and South Korea, has driven the region's higher leverage.
China-related growth also boosts Hong Kong's credit/GDP ratio, which is the highest in the region, forecast at 229% by end-2012.
Relaxed underwriting standards, inadequate controls, property speculation and unproductive investments are likely to lead to a rise in bad debt, as Fitch has doubts over whether current credit and economic growth in APAC can be sustained.
APAC countries in the highest 'MPI-3' category of Fitch's macro prudential risk indicators (MPI) represent 43% of Fitch's forecast 2012 GDP for the region, with China accounting for 38%. The MPI measures the build up of risk within financial systems with ‘3’ defined at a high vulnerability to potential systemic stress.
There are currently 5 countries that have a '3' - China, Hong Kong, Mongolia, Indonesia and Sri Lanka.
Fitch expects economic growth in APAC to moderate in 2013-2014, due to global uncertainty which should lead to lower credit growth and in turn help to unwind risks built up from the post-2007 growth phase. Asian countries are also wealthier than in 1997 when the Asian crisis hit, placing the region in a stronger position to counter potential stresses.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Mark Young is a Managing Director heading up the Asia Pacific region in Fitch Ratings’ Financial Institutions Group. Prior to moving to Singapore in 2011 Mark had 11 years of experience in ratings covering developed and developing markets at Fitch based in London. Previous to this he was based in Fitch’s South African office.