In our new Working Paper “Emerging markets: Asian companies expected to consolidate their debt” we take a look at the private-sector debt picture in the emerging markets, with a particular focus on the situation among non-financial corporates. Without wanting to downplay what is certainly a difficult debt situation in other emerging markets, such as Brazil and Turkey, the main debt problem lies in Asia. The fact that the Asian corporate sector has the biggest debt mountain out of all of the emerging market regions comes as little surprise: the Asian growth model, which is based on exports and investment, has been financed increasingly by debt. Given the level of debt already reached, this model is edging ever closer to its limits and we have to expect the growth slowdown in Asia to continue over the next few years.
We cannot rule out the possibility that the high corporate debt level has created a lending bubble that could set a crisis in motion. It is, however, virtually impossible to accurately forecast this sort of credit crunch. As long as growth in the Asian economic region remains, as we expect, in a range of between 5 and 6% (for comparison: annual average growth 2002-2011: 8.3%), corporate lending growth could well match, or even exceed, this figure. And as long as interest rates remain relatively low, companies will be spared any sharp increase in their interest burdens. A lot ultimately depends on whether economic policy can gradually slow the pace of lending growth by imposing regulatory measures, i.e. by putting an end to the tax incentives that debt financing enjoys compared with equity financing in the corporate sector. All of these factors will play an important role in determining how intensive the adjustment process will be and, as a result, also how much wind can be taken out of the growth sails. Within this context, developments in China's non-financial corporate sector will also be pivotal.
In the short and medium term, however, we believe that the risks emanating from the Chinese corporate sector are manageable, mainly because the biggest debt problem affects companies that are in the state's hands (state-owned enterprises or SOEs). The Chinese government still has enough fiscal leeway in order to stave off a systemic crisis among SOEs. In general, however, there will be no getting round the need for write-downs, the restructuring of viable companies and the closure of unprofitable SOEs.