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Asian corp leverage on the rise: BoA-Merrill

07 Aug 2013

Increased leverage at Asia corporates is a growing problem, given the risks of a slowdown and rising financing costs that could result from any tapering of quantitative easing, says the bank.

Countries in Asia saw a substantial increase in corporate debt, raising concerns that some companies will be unable to manage rising leverage amid a potential economic slowdown and mounting financing costs.

Overall Asian corporate leverage has been rising since early 2012, increasing to about 110% of GDP in the first quarter of 2013 after holding steady at about 102% from 2009 to 2011 during the global financial crisis, according to Bank of America-Merrill Lynch (BoA-Merrill) in a report released on August 2.

The increases have been driven largely by China and Korea. But the financial centres of Hong Kong and Singapore, as well as Malaysia, also saw substantial increases over the last five years, adds the bank. Philippines, Indonesia and Thailand saw much more modest rises in comparison.

“Overall, corporate leverage ratios have been rising across Asia,” said Hak Bin Chua, Singapore-based economist at BoA-Merrill. “Near zero US interest rates have led to low domestic interest rates, which have probably led to a surge in corporate borrowings from both banks and the bond market.”

Korea, China and Malaysia rank the highest in terms of corporate leverage ratios, standing at 129%, 118% and 96% of GDP respectively, excluding the financial centres of Hong Kong (147%) and Singapore (125%), notes BoA-Merrill. Indonesia (27%), and Philippines (43%) rank the lowest. For India, corporate loans excluding bonds account for 22.5% of GDP.

“Funds raised in Hong Kong and Singapore, however, may be for regional neighbours, and may not be for the domestic economy,” said Chua.

Corporations from Association of Southeast Asian Nation (Asean) have been re-leveraging since 2010 after deleveraging since the Asian crisis. The acceleration in debt has been especially visible over the last two years, highlights BoA-Merrill.

For example, corporate leverage in the region has risen to 59.4% of GDP at end-first quarter 2013 from 44% during the first quarter of 2009, which was during the global financial crisis.

The bond market has been largely used by Asian corporates for financing purposes. For example, corporate bonds as a share of GDP are largest for Korea (52%), Malaysia (43%) and Singapore (37%) in the first quarter of the year.

Additionally, rate of increase in corporate bonds terms of percentage points of GDP from 2000-2013 is largest for Korea, accounting for a 34.1pp increase, Singapore with 16.3pp rise and China with 12.9pp climb.

“Corporate bonds may have even substituted for bank borrowings in several Asian countries, supporting the “crowding out” thesis,” said Chua. “This is seen in Malaysia, Thailand and the Philippines, where bank loans has fallen as percentage of GDP but corporate bonds have risen as percentage of GDP.”

“How the corporate debt dynamics will play out over the coming years will be important for growth and markets,” he added. “Pressures are emerging in Asia which could lead to a moderation in rate at which corporate debt is rising.”

For example, China may be embarking on greater efforts to deleverage, given concerns about the heavy debt burden. The Federal Reserve’s quantitative easing tapering could slowly lead to a normalisation of US interest rates, which is already being reflected in the jump in long-end Asian yields, highlights BoA-Merrill.

Asian companies, particularly in Southeast Asia, may take a more cautious approach in raising borrowings given the risk of sharply higher financing costs down the road, adds the bank. Asian central banks are also introducing more macro prudential measures to keep leverage in check.

“Measures have been largely targeted at households, but selectively, this might have also ripple effects through to corporate leverage,” said Chua.

07 Aug 2013