The global economy is more connected today than it has ever been. Last week, I spoke about how the U.S. economy was not picking up steam and expanding as we would like. I mentioned the problems in the emerging markets as one of the contributing factors. Let us look at one of problems within the Asian countries that will impact global economic growth. This increasing problem will also affect the world's largest economy.
Household debt is rising at an alarming pace.
We are seeing, in Asia and the Pacific Rim, household debt growing rather quickly. This is increasing worries that consumers will have a difficult time repaying their debt as interest rates start to trend upwards. Over the last few years, we have seen consumer debt surging across these emerging markets (EM). This includes financing to buy new condominiums (condos), cars, motorcycles and everything else consumers want to buy. In particular, Singapore and Thailand have seen an alarming growth rate in credit growth that has exceeded the levels we saw in the United States (U.S.) during its boom. China, Hong Kong, Malaysia and Korea are showing credit growth higher than what we saw in the United Kingdom from 2001 to 2007.
There is a clear warning sign in Singapore that there is a problem. We are seeing a spike in pawnshop deposits. Singapore's pawnshop deposits rose 4 million in 2012. This is up from the 2.7 million we saw back in 2007. Loans here have surged as well. They are up 344 percent over the same time period (to consumers) and are now over 7 billion Singapore Dollars. This is the last data reported in 2012, released last month from OSK-DMG. This is a trend that will continue. Why? It is being fueled by cheap credit, thanks to easy monetary policies enacted by western and more advanced economies. In 2010 casinos began opening in Singapore, this will also be a key driver for pawnshop growth. As the government is clamping down on unsecured lending (credit cards) we will see more problems with consumers paying back debt and in turn, looking at pawnbrokers for cash.
We are now seeing this trend starting to expand into countries like Malaysia.
Eventually, Asian consumers will start to struggle paying back debt. Historically, Asian debt has been considered "safer" thanks to the regions reliance on something called macro-prudent measures. These countries have stricter loan to income ratios which have worked keeping debt in check. This is starting fail a bit now as consumers are finding loopholes to circumvent these measures. So far, interest rates have remained low. This has helped consumers in Asia but has formed credit bubbles, like what we are seeing in their housing markets. As rates start to climb higher, thanks to the impending end to the U.S. quantitative easing program, this will pose problems for consumers who will have to shell out more cash to cover their existing debt.
Rate increases have already begun. Last Thursday, the Philippine Central Bank raised its secondary interest rate and have already raised its bank reserve deposit rate twice this year. The central bank in Indonesia has already raised its rates five times since 2013. It is a safe bet to expect other regional banks to follow suit and tighten conditions, by raising rates, over the next year. They will act before the U.S. raises its rates.
While consumer credit, and this binge, is certainly a systematic risk it might not lead to an actual credit crisis in the Asian and Pacific Rim. It will definitely pose a growth problem for Asia and we are already seeing the effects with U.S. data as well. Last week, the U.S. current account deficit surged. It is now at its widest point in over a year and a half. Exports slumped and primary income declined. The current account now stands at $111.2 billion up from $87.3 billion in the fourth quarter.
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