Emerging Asia: Coface warns of growing risks
In the United States growth and the confidence of business leaders isreturning. Overall,advanced economies are doing better: after two years of recession, theeurozonewill record modest but positive growth in 2014 (+1%). Within the Economic and Monetary Union, Germany is expected to show a remarkable recovery of 1.8%. France willexperience slow growth (0.6%) and the end of the recession is in sight for Spain and Italy. But despite these improvements, the confidence of business leaders has not yetreturnedin Europe.
The concernscome fromthe emerging countries, which are facing a structural decline in growth (estimated at 4.8% overall in 2014), even though the BRICS countries will benefit indirectly fromthe recovery in advanced economies.
United States: A2 placedonpositive watch, despite the budget paralysis
The prospect for sustained and balanced growth (estimated at 1.5% in 2013 and 2.2% in 2014) leads Coface to place the A2 assessment of the United States on positive watch, despite the current budgetary pressures.
Business investment is robust. Private consumption, the main driver of growth, is making better progress than before the crisis, as households reach the end of their debt reduction. Improvements are also noticeable on the business side. Margins and profitability are increasing while debt levels are low (55% compared to 85% in the eurozone), although growth in some sectors (construction materials, copper, paper) remains anemic. Businesses are the strong segment of the economy: they have low debt and are very profitable.
Though the government shutdown was a surprise, it should not have a significant effect on business provided that it does not persist in the long term. However, uncertainties related to the US government debt ceiling remain high and the risk of non-recovery cannot be ruled out. In this risk scenario, private demand could be significantly affected. However, at this stage our main scenario is that this impasse should be avoided at all costs, so that private consumption and investment remain robust despite further possible budget cuts.
Brazil: A3 placed on negative watch, due to structural problems
Growth in Brazil is disappointing (estimated at 2.3% this year and 2.9% in 2014) due to less buoyant private consumption and particularly weak business investment. The origins of the economic difficulties are structural. The lack of infrastructure is constraining business. Rising interest rates in the wake of the Selic may reach nearly 10% in late 2013, which averts any prospect of a significant recovery.
The slowdown in consumption weakens industries and businesses that depend on it: household appliances, automotive, electronics. Rising interest rates and inflated prices for imported components and machinery, due to the depreciation of the real, are made worse by taxes and production costs that remain high. Companies hesitate to accelerate their investments. In this context, payment incidents of Brazilian companies recorded by Coface remain at a high level, close to the peak of 2009. Both macroeconomic and microeconomic factors justify a negative watch of Brazil's A3 assessment.
Thailand: A3 placed on negative watch, due to rising household debt
Risks are increasing in Thailand, whose A3 assessment is now on negative watch. Growth there has fallen sharply in 2013 and will remain constrained by household debt (80% of GDP) in 2014. The effects of previous stimulus measures are wearing off. In addition, the country will continue to suffer from sluggish exports, particularly related to its dependence on the Chinese slowdown.
The growth potential in Asia remains high, driven by the middle class
Asian economies have weathered the double blow of the global crisis of 2008-2009 and that of the sovereign debt of the eurozone, due notably to the dynamic consumption of their households. For example, since 1995 per capita consumption has almost tripled in China and has more than doubled in India, illustrating the catch-up underway in the least developed countries. This catch-up, mostly incomplete for now, will continue over the long term and will be conveyed by the expansion of the middle class in Asia. As a consequence of sustained GDP growth and public policies to support consumption, household income is rising. The aging population and rapid urbanisation are also contributing to it.
Three key areas will continue to fully benefit from increased consumption of the middle class in the coming years:
- automotive, due to the growth in demand in Asia;
- high-end consumer goods, buoyed by the Chinese preferences for luxury brands;
- tourism due to the large numbers of Chinese travelling to other countries in the region.
Malaysia, South Korea, Singapore and Thailand: household debt similar to that of the United States at the time of the subprime crisis
If the boom in consumption in emerging Asia reflects the economic development of the region, it is also linked to easier access to bank credit. Hence, excessive household debt in some countries could adversely affect economic activity in the medium term. Four countries are most at risk. In 2012, the ratio of household debt to disposable income reached 194% in Malaysia, 166% in South Korea, 134% in Singapore and 112% in Thailand, whereas it was of the order of 130% in the United States in 2008, that is to say at the start of the subprime crisis. The result has been a household debt service higher than in the United States in 2008 and in Spain in 2012 (where it is largely responsible for the deep recession).
It is South Korea that dominates the Top 4: the structure of its debt is an additional risk factor because the proportion of variable-rate mortgages has reached 55%, compared to only 10% in the United States in 2009.
Moreover, this excessive debt caused by too dynamic credit may make Asian countries more vulnerable in the medium term with volatile external financing and thus capital outflows. It also may result in sudden depreciations in the exchange rate, like those observed during the summer of 2013.
"The parallels with the situation of US households at the time of the 2008 crisis don’t necessarily mean that a crisis of similar magnitude is imminent in emerging Asia. But moderation in household consumption will be needed over the coming years. To address the risk that over-indebtedness of households poses to the economy and the banking sector, local authorities must take preventive measures, such as tighter monetary policies and stricter prudential rules," says Julien Marcilly, Head of Country Risk.
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