By Daniel Hunter
Coface's latest Panorama report concludes that 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 dynamic household consumption. For example, since 1995 consumption per capita 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 in 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 ageing population and rapid urbanisation are also contributing to this development.
Three key areas will continue to fully benefit from the increased consumption of the middle class in the coming years:
- Chemicals: the risk moves from 'medium' to 'high' in Europe and in Emerging Asia.
In Europe, the profitability of chemical companies fell by 19% in one year, due to sluggish demand and competition from US exporters. In Emerging Asia, and more particularly in China, SMEs have become the first victims of the drying up of credit supply.
- Pharmaceuticals: in Europe: the risk is 'high'.
In Emerging Asia and in North America we note a relative stabilisation (risk considered moderate and medium respectively). In Europe, dispensaries (whose sales and margins are falling) and distributors are affected by measures to reduce the growth in health spending.
- European automotive, the most affected sector: the risk is downgraded to 'very high'.
The 2009 crisis drastically changed the stakes for the global automotive industry. The European automotive industry was particularly affected and has continued to decline, faced with structurally high production costs and a lack of domestic outlets. The new wave of bankruptcies in the French automotive sector illustrates the European problem: between August 2012 and July 2013, their number increased by 11%.
Worse still, the financial cost of these bankruptcies for suppliers is up 35%, following a greater number of larger companies going bankrupt, particularly among traders (58% of the total) and sub-contractors (24% of the total). The situation is even more worrying since at the national level, all sectors included, the number of bankruptcies only increased 6% and the cost fell by 5.8%.
In Malaysia, South Korea, Singapore and Thailand, household debt is 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 therefore capital outflows. It also may result in sudden depreciations in the exchange rate, such as 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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