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A leveraged boom

21 February 2013 By Andy Mukherjee

Southeast Asia’s heady debt-fuelled growth is beginning to resemble the unsustainable mid-1990s boom. But authorities are shy to raise interest rates as doing so could attract more overseas capital, stoking inflation and financial instability. Direct curbs on credit and capital flows may prove more attractive.

Growth is strong across the region. Thailand’s GDP jumped almost 19 percent from a year earlier in the final quarter of 2012. Malaysia and the Philippines saw better-than-expected expansion of 6.4 percent and 6.8 percent in the same period, respectively. Growth in Indonesia has been above 6 percent in five years out of the past six. Singapore is at full employment.

The rising credit intensity in these economies may not be as pronounced as in China; nonetheless, it is a cause for concern. On average, commercial credit as a proportion of GDP for the region’s five largest economies – Indonesia, Malaysia, Singapore, Thailand and the Philippines – is approaching the pre-1997 crisis peak of 75 percent, according to Breakingviews calculations.

There’s no immediate inflation threat. Besides, countries like Thailand, Malaysia and the Philippines haven’t had a decent investment boom in a long time. The desire to prolong the party – and the fear of attracting more overseas capital — explains the reluctance to raise the domestic price of money. Bank Indonesia has left its policy interest rate unchanged for a year; Malaysia’s central bank last raised rates 22 months ago.

But doing nothing is risky. So policy makers are likely to reach for a different set of tools. Central banks could increase the pace at which they sterilize capital inflows by buying low-yielding foreign-currency assets and selling high-yielding domestic bonds. The fiscal cost of this strategy is a small price to pay for ensuring financial stability. More direct controls on capital inflows are also possible, especially if rising wages feed into inflation expectations.

But before that, the authorities will try to curb credit supply by raising reserve ratios and bank capital risk weightings. The answer to a property mania is to tighten loan-to-value norms, shorten repayment periods and dissuade foreign buyers; Singapore has tried them all.

Ultimately, though, the dams offer only temporary reprieve against waves of global liquidity. A few more years of credit-fuelled growth will make the repeat of a 1997-type crisis a distinct possibility.


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