Household Debt’s Untidy Room Ramifications

The IMF’s fall Global  Financial Stability Report cited the development contribution of rising emerging economy household debt the past decade to a median 20 percent of GDP, one-third the industrial world level, but cautioned about longer term recession and crisis scenarios as deleveraging occurs with overhangs. Developing countries may be “less prepared” to handle the squeeze with institutional limits such as missing personal bankruptcy codes. For the highest debt quartile the average was one-third of GDP in 2016, in part due to cross-border liquidity expansion from loose monetary policy. Credit access can lift domestic demand and consumer wealth, but future adjustment may be sharper with global interest rates around zero for so long. Housing and other investment returns may not meet expectations and borrowing often goes for non-productive purposes. From the supply side bank balance sheets can suffer, and risks be exacerbated with foreign currency-denominated loans. Ratios are under 10 percent of GDP in Argentina, Egypt, the Philippines and Ukraine; and over 50 percent in Malaysia, South Africa and Thailand. One-third the total is mortgages and most are recourse-based, allowing other family collateral seizure upon default. In advanced economies Australia and Canada stand out for their breakneck pace beyond historical norms, and leading emerging markets Chile, China and Poland have also built up fast. Since 2008 the yearly clip was 6.5 percent, well over output growth. Low income households are typically excluded in early industry stages but often turn to micro-finance sources that may not be tracked or regulated. Econometric models indicate that a 5 percent household debt increase over 3 years will halve future growth over the same period. The drag is mainly due to the mortgage element that accompanies house value correction, especially in emerging markets with narrower asset class diversification. An open capital account and fixed exchange rate heighten risks, including banking crisis probability that spikes at 65 percent of GDP, according to empirical work. Financial sector depth and quality bank oversight can cushion the medium-term negative correlation, and stricter capital requirements and dividend suspension may be effective counters. Shared credit registries and education to ward off predatory practices are important steps, the Fund asserts. Macro-prudential measures, such as on loan-to-value and debt-service-to-income, and consumer protection rules are valuable. Mortgage contracts can also be designed for more risk-sharing and resets in the event of extreme circumstances, the chapter suggests.

South Africa’s multinational banking groups have been targeted by ruling party and anti-poverty activists for loan forgiveness, amid accusations of deceptive and punitive rates, as debt burdens have wracked private consumption. A dedicated retail provider with close ties to them was forced to shut down with an extreme portfolio and capital gap, as the central bank now comes under broad pressure to focus less on financial stability than economic aid. Lawmakers reportedly are considering charter changes which would mandate stronger defense of average savers. International financial services firms have likewise come under harsh view with questionable allegiance to the business elite lodged in families with fortunes often predating independence and the end of apartheid. A newcomer clan, the Guptas of Indian background, allegedly worked with foreign auditors and management consultants to misrepresent its company accounts and wangle insider deals with the Zuma administration leaving a household odor.