World Bank issues alert on debt servicing, property prices

Published Mon, Oct 6, 2014 · 09:50 PM

[TOKYO] POLICY shifts by leading central banks, coupled with monetary tightening in some Asian economies, could bring problems of debt servicing to households and to business firms in the region, and also trigger falls in property prices, the World Bank has warned.

The latest East Asia Pacific Economic Outlook Update, published Monday by the Washington-based institution, adds yet another voice to a growing chorus of concern over the possible adverse impact globally of changing monetary conditions.

"Global financial conditions are likely to tighten, and financial volatility may also rise, especially if geopolitical tensions escalate. This may create debt-service challenges for some economies.

"Increased divergence in monetary policy among major reserve currencies (also) raises the risk of disorderly exchange rate and interest rate movements," says the World Bank, adding that "the adjustment to the new quilibrium could prove disruptive".

What the World Bank calls the "unwinding of large central bank interventions", in an environment of uncertainty about future policies, could, it warns, "be accompanied by abrupt market reactions, increased volatility, and overshooting of interest rates".

Rising interest rates could create debt service problems for some East Asia and Pacific countries. "In many countries, debt service ratios are now at historically elevated levels, owing to the sharp accumulation of debt since the global financial crisis."

The global economy is "showing signs of recovery, but at an uneven pace", and global growth is expected to rise modestly to 2.6 per cent in 2014, and an average 3.3 per cent in 2015-17, according to the report.

But the World Bank cautions that "significant uncertainties remain about the strength and sustainability of the recovery in high-income economies, as well as about the timing of policy actions by central banks in these countries.

Despite prospective monetary tightening in the US, growth there should be around 2 per cent for 2014, rising to 3 per cent next year, while in both Japan and the euro area, growth is projected at just 1 per cent in 2014, rising only "slowly thereafter".

Growth in the developing East Asia Pacific region as a whole is forecast to moderate gradually from 7.2 per cent in 2013 to 6.9 per cent in 2014-15. But the outlook is clouded with uncertainty, the World Bank says.

In China, growth will gradually moderate to 7.4 per cent in 2014 and 7.1 per cent in 2016, reflecting intensified policy efforts to address financial vulnerabilities and structural constraints, which will "place the economy on a more sustainable growth path".

In the rest of the East Asia and Pacfic region, excluding China, "growth will bottom out at 4.8 per cent in 2014, reflecting the slowdown in Indonesia and Thailand, before recovering to 5.3 per cent in 2015-16".

A key risk to the (Asian) regional outlook is, however, that the global recovery, and the associated pickup in demand for regional exports, may be slower than anticipated, the World Banks says.

Meanwhile, property prices in some countries are likely to come under pressure, according to the latest Economic Outlook. It mentions especially Malaysia and the Philippines where price rises have been "pronounced" and outpaced income growth.

"Similar patterns have emerged in developed economies of the region such as Hong Kong, China; Taiwan, China; and Singapore. More recently, signs of weakness have emerged in the real estate sector, raising concerns about price sustainability."

Historically, "episodes of monetary tightening have been strongly correlated with declines in housing prices", the World Bank notes. "Monetary policy normalisation in the US and UK may therefore accelerate the real estate downturn."

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