THE total non-financial debt – comprising corporate, household and government debt – of the Asean+3 region reached around 300 per cent of the region’s gross domestic product (GDP) at the end of last year.

This is a gradual increase in the debt-to-GDP ratio from about 230 per cent over the past 15 years, said Kevin Cheng, the lead economist of the Asean+3 Macroeconomic Research Office (Amro) on Tuesday (Dec 5).

He was speaking to the media shortly after the macroeconomics surveillance organisation launched its inaugural financial stability report at a forum in the Japanese city of Kanazawa.

The report delved into recent market developments and potential risks in the region in these “turbulent times”, while providing analysis of the impact of high debt on financial stability.

Asean+3 comprises the 10 member states of the Association of Southeast Asian Nations, as well as China, Japan and South Korea.

Amro director Li Kouqing said: “A rigorous and timely assessment of the economic situation and near-term prospects lays the foundation for detecting risks, vulnerabilities, and challenges that could potentially lead to economic and financial instability.”

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He added that more than 40 per cent of global growth is expected to come from the Asean+3 region, which Amro expects to grow by 4.3 per cent this year and 4.5 per cent in 2024.

Amro’s chief economist Khor Hoe Ee said: “Given the swiftly evolving global financial landscape and its substantial reverberations on the region, the significance of financial surveillance in Asean+3 cannot be overstated.”

Inflation risks

A prominent risk for the region is the resurgence of inflation, the report noted.

Headline inflation in 2023 declined in the Asean+3 region after rising rapidly last year, but at different rates across economies.

For instance, while Indonesia and Thailand have brought their headline inflation back to or below the official target range, it remains above the price stability target in South Korea, Japan and the Philippines.

“The key takeaway is that resurgence in inflation cannot be ruled out. And if that happens, that will complicate central banks’ effort to safeguard financial stability while maintaining price stability,” said Dr Cheng.

Corporate debt landscape 

Private debt, which accounted for two-thirds of the region’s total debt, has surged against a backdrop of robust economic growth, a rapidly growing middle class and urbanisation, as well as favourable global financial conditions, said the report.

Currently, the Asean+3 region’s corporate debt-to-GDP ratio has reached 140 per cent and stands among the highest in the world.

The region’s corporate debt is mainly driven by economic growth, especially before the pandemic, noted the report.

Manufacturing companies hold the largest share of corporate debt within Asean+3 because of their capital-intensive activities, such as machinery purchases and longer production times.

Another sector with the most concentrated corporate debt is raw materials as several Asean+3 economies are major producers of commodities such as oil, steel, coal and palm oil.

To strengthen corporate resilience, the focus should be on increasing profits and reducing liabilities, the report added.

Impact of increased household debt

Household debt in the Asean+3 region is lower than corporate debt, as a share of GDP, but has increased significantly in some economies.

Within the region, the household debt-to-GDP ratio is notably higher than the global average in South Korea, Hong Kong and Thailand, but remains low in most Asean economies.

Amid the sharp rise in interest rates globally and elevated property prices in some economies, the risks from high household debt are also likely to have increased.

A higher debt burden means that household debt distress has a higher chance of becoming systemic when widespread, and when housing prices fall, the incentive for default increases.

The report found that real GDP growth and bank capital inflows stand as the primary domestic and foreign drivers of household credit growth.

Sustained capital inflows have been stronger in Asean+3 than in other regions, which means that a sudden halt could lead to a region-wide slowdown in household credit growth, heightening systemic risk.

Besides macroprudential policy, other ways of curbing financial stability risks from high household debt include strengthening regulatory oversight and data collection, noted the report.

Public debt landscape

Public debt constitutes about one-third of the total debt stock of Asean+3.

But while the region’s public debt-to-GDP ratio is moderate compared to other regions, it is heading higher and has remained above pre-pandemic levels in several Asean economies.

As the ratio increases, the likelihood of fiscal crises does too, and more so in emerging markets, the report noted.

At their respective debt levels as at 2022, the average probability of a fiscal crisis is estimated at 37 per cent for an average emerging market economy and 7 per cent for an average developed economy.

To minimise the financial stability risks of public debt, the authorities should establish a sound debt structure with an appropriate maturity profile and proper currency distribution; diversify investor bases; and continue to boost market liquidity, the report said.

Said Dr Khor: “In addressing the risks posed by the higher debt levels amid tighter monetary conditions, authorities need to strengthen their defences through a well-balanced policy mix across monetary, fiscal and macroprudential policies. Close cooperation across jurisdictions is also essential.”