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Asia loses its policy punch as consumers pile on debt

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Consumers and even firms are so indebted that they can't borrow more, no matter how cheap loans are.

[SINGAPORE] Puangpeth Urabut, a 40-year old government employee in Thailand's northeastern province of Nong Bua Lamphu, is the archetypical Thai consumer - neck-deep in debt and borrowing against future income to fund basic consumption.

Puangpeth earns about 25,000 baht (S$966) per month but has a pile of debt to cover, including four credit cards with 250,000 baht due on them and a car loan of 300,000 baht. She even draws cash from one credit card to service another.

"It's getting more difficult for me to service my debt," she says. "I hardly make ends meet and will have to keep borrowing."

Consumers, like Ms Puangpeth, whose debt-fuelled spending had propped up Asia's struggling economies over the years, have now become a problem for their central banks, even with interest rates at record lows.

Consumers and even firms are so indebted that they can't borrow more, no matter how cheap loans are.

As the finance ministers of the world's 20 major economies said last month, "monetary policy alone cannot lead to balanced growth". Borrowing surged over the past seven years as money flooded into higher-yield emerging markets from the world's biggest economies, where central banks had slashed interest rates and printed money in response to the financial crisis.

The Bank of Thailand recognises the problem. It has held interest rates at near record lows for 16 months despite expectations for low inflation and weak domestic and global demand, wanting more to be done on fiscal policy and structural reform.

"There are limits on what monetary policy can do to help stimulate economic growth further," BOT governor Veerathai Santiprabhob told Reuters.

Eight out of 14 of Asia-Pacific's biggest countries now have consumer debt that equates to more than three-quarters of their annual economic output (GDP), data from HSBC shows.

"It does make policymakers more cautious about cutting interest rates," said Frederic Neumann, co-head of economic research at HSBC in Hong Kong.

"Even if they did cut interest rates, the resulting acceleration in consumer spending that they get is probably diminished. The bang for the buck diminishes."


Measured by the overall increase in debt to GDP, the biggest increases since 2008 have been in China, Hong Kong, Singapore, Malaysia and Japan.

Overall debt-to-GDP is around 250 per cent in Korea, Malaysia and Australia, and even higher in China, Hong Kong and Singapore.

Barring China, overall debt in most Asian countries isn't yet a threat to economic stability, as the borrowings are primarily by governments or publicly owned entities.

Their high levels of consumer debt do not pose an urgent worry, but the risks could become more pressing if central banks eased policy much further.

Korean household debt amounted to US$1 trillion at the end of March. The central bank has said the government should use fiscal policy to restructure and revive a flagging economy because further rate cuts are both ineffective and risky.

As with Thailand, the Bank of Korea held off on cutting rates last month while the government came up with a heavy 20 trillion won (S$24.46 billion) stimulus plan.

Malaysia surprised economists with a cut, but it is among the few countries with little capacity for any fiscal stimulus.

Most Asian countries still had some room to cut rates, said Wellian Wiranto, an economist at OCBC Bank.

"But the effectiveness has come down, that's for sure. The demand for loans is not quite there."

Mr Wiranto also worries that household debt will remain elevated for a long time. "You need, at the end of the day, improvement in general growth and improvement in incomes, and then you can start to service down your debt, deleverage. I don't think we are in that environment globally or regionally where you can have a huge uptick in growth for years to come, unfortunately."