The BIS’ Private Debt Buildup Letdown
The BIS repeated alarms over the accumulation of EM private and household debt since the 2008 crisis, as major investment houses noted that its banking and bond data base only comprehensively covered half a dozen countries and tried to construct their own broad estimates. JP Morgan described the surge as an “elephant in the room” with corporate bonds outstanding tripling from $1 trillion then and shadow banking bursting onto the scene in China and elsewhere. Credit/GDP rose 50 percent to 125 percent over the period and annual credit growth averaged 15 percent. Bank loans were near 100 percent of the figure, and businesses accounted for three-quarters of borrowing with Asia as the greatest regional concentration. Foreign currency activity is only one-tenth the $30 trillion private non-financial total, but governments may not be able to handle supply shocks despite decent balance sheets as they already grapple with dollar strength and capital outflows. BIS statistics are complete for developed markets but lacking in developing ones except for China, Russia, Korea, Mexico, Hungary and Poland. They track cross-border lines on a residence as opposed to nationality basis, missing large movements through offshore centers. Even without China overall debt/GDP reached 90 percent at the end of last year, and although quasi-sovereigns with at least official implicit support constitute half of external bonds their domestic share is unknown.
For 17 of 23 countries in the JP Morgan universe the measure jumped at least 15 percent from 2007. Brazil, China and Russia have raised the most through offshore subsidiaries and Hong Kong and Singapore as Asian financial centers led the pack with 35 percent increases. In the region Korea, Malaysia and Thailand spiked and 18 percent-plus gains were registered in Turkey, Chile and Poland. Declines or small expansions in contrast were the pattern in Hungary, South Africa, Argentina and India. Bank credit for the two dozen members was $25 trillion versus $3 trillion in securities as the former leapt over 25 percent the past eight years. The corporate change has been double the household one at 12 percent, with the latter outside Asia prominent just in Poland and Turkey. Financial bonds in circulation at $4.5 trillion are one and a half times non-financial ones, indicating still heavy non-deposit reliance. Including banks in external liabilities boosts the number to 20 percent of GDP on average with every country except Argentina over 10 percent in the full roster.
Exchange rate de-pegging which could aggravate loads is now under the microscope after moves in China, Vietnam and Kazakhstan but big adjustments may have preceded Beijing’s initial 2 percent tweak as commodity exporters remain under pressure. Gulf dollar regimes should stay intact although local borrowing will pick up to avoid reserve depletion in currency defense. In Central Asia oil power Azerbaijan already devalued by one-third in February, and still runs a current account surplus with an ample sovereign wealth fund backstop. Egypt may lower the pound toward 8/dollar in its next move to reflect parallel market weakness and accommodate volatility heading into long-promised parliamentary elections. Morocco and Tunisia may follow suit with managed pegs against the dollar and euro with the continued buildup in security and political transition tensions.
