Surge in global household debt fuels concern: IIF

Tokyo

A NEW international debt crisis, many believe, could be triggered by high levels of government debt and emerging market corporate borrowing. But a new study says that mushrooming household debt in some advanced and emerging economies also represents a serious threat to the global economy.

Singapore is among the top half-dozen emerging economies where the recent surge in household debt has been most marked since 2007, according to the report issued on Tuesday by the Washington-based Institute of International Finance (IIF). The Republic is ranked fifth-highest among 44 advanced and emerging economies, says the IIF, an association representing many of the world's largest private and public financial institutions.

Accelerating levels of household debt could become a serious worry as interest rates begin to rise after a decade at historically low levels, the IIF notes. This could impose a heavy burden on households and also damage growth at the macroeconomic level.

"Since the financial crisis, market attention has been trained on high levels of public-sector debt (mainly in mature markets) and on non-financial corporate sector debt (mainly in emerging markets)," says the report.

"However, it is well worth paying more attention to developments in household sector debt. A number of major countries including the US have seen significant household sector deleveraging, with household sector debt to GDP falling from near 100 per cent in 2007 to 80 per cent at present."

In contrast, says the IIF, "quite a few mature markets including Norway, Canada and Switzerland have seen a rapid increase in household sector debt - to 100 per cent of GDP or more over the past decade".

"In addition, many emerging market countries - notably fast-growing Asian markets such as China, South Korea, Singapore and Thailand - have also experienced a sharp rise in household sector indebtedness."

In South Korea, the ratio of household debt to GDP has reached 93 per cent while in Thailand and Malaysia, it is 70 per cent, 68 per cent in Hong Kong and 61 per cent in Singapore. The 60 per cent threshold is important because at this level or higher, it can put pressure on consumption and growth in emerging economies, the report says.

Households that have taken on a great deal of debt in a relatively short time "may be hard-pressed to sustain this pace of borrowing", the report warns. This could result in a slowdown in debt-fuelled spending, putting a key component of growth (personal consumption) at risk.

"This drag on growth could persist for some time - at least until household balance sheets undergo a period of deleveraging."

Even more serious, the report suggests, is the fact that "in many countries, the distribution of household sector debt - and notably the debt servicing burden, are very uneven and are skewed significantly to low-income, asset-poor households".

"As interest rates are expected to rise in the future, increasing the debt and servicing burden on those households, many are likely to come under strain, with important economic, social and political implications."

Many countries escaped the real estate market collapse experienced by the US from 2007 to 2009, the report notes. "Among these countries, some in mature markets have gone on to see a significant buildup of household sector debt, accompanied by a rise in real estate prices to record levels."

"If house prices in some of these countries and stock markets in general were to correct meaningfully in a rising interest rate environment, the high level of household debt in some countries would engender growing delinquency and credit losses for the lending financial institutions."