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The pandemic and subsequent slowdown in advanced economies have halted the export-oriented growth of developing nations in Asia, pushing many countries to seek other sources of dynamism. The debt-driven bubble in the U.S. and some other European ought to have served as a warning to other countries to avoid the precarious path of Asia debt.
After years of economic expansion led by the continent’s increasing population, Asia has arrived at a crossroads as a result of the Covid-19 pandemic, high inflation and quick interest rate hikes in the U.S.
Wrong policy decisions led to Asia debt
Apparently, economic policymakers in the developing nations of Asia did not learn a lesson from their western counterparts. Instead, governments chose to drive their markets to expand based on growing Asia debt rather than rising wage incomes to enable recovery from a crisis that was marked by the bursting of a credit bubble. China is the most striking example of this, with debt-to-GDP ratios more than doubling for all sectors – corporates, households and provincial governments. Nonetheless, debt also increased steeply in several Asian countries.
Not much has been commented on the rapid increase of external debt in the past decade. However, this is significant because external Asia debt can provide an additional source of vulnerability for these developing countries. The overall cross-border and foreign currency-denominated debt of Asian developing economies increased from $375 bn at the end of the first quarter of 2007 to $1.394 tn by the first quarter of 2019.
Foreign debt dominates
Economists CP Chandrasekhar and Jayati Ghosh say that a greater share of external or foreign-currency-denominated Asia debt is not only held by banks as credit in the traditional pattern but much more of it is now in the form of bonds held by private non-bank investors. By the last quarter of 2018, the share of total external debt held as securities by non-banks increased was 58% in Indonesia and 63% in the Philippines. In Thailand, it had increased to 22% from 14% six years before, while for India the increase was from 7% to 21% over the same period.
World Bank vice-president Manuela Ferro told Nikkei, “The biggest risk I see is that debt stocks increased significantly over the past few years.” Ferro, however, rejected apprehensions that the region is moving toward stagflation. On the other hand, the World Bank VP predicted that Asia’s growth rate could recover to 5% without further shocks.
At the same time, Ferro emphasised the significance of a global economy and multiparty cooperation. “A world in which countries do not cooperate on things of common interest and on things that are existential is a very short-sighted world,” Ferro noted.
Asia debt may result in slow growth
Ferro forecasts a significant slowing of regional growth prospects, largely driven by a decline in the World Bank’s projections for China’s growth. Hence, the World Bank has lowered its growth projection for 2022 to 4.3% for China, mirroring the effect of several outbreaks in Shanghai and Beijing as well as external Asia debt.
According to the World Bank, the other effects are the impact of the Ukraine invasion by Russia. While war still does not have any direct effect on East Asia and the Pacific region vis-à-vis trade links with Russia or Ukraine, the region is already being affected. In fact, East Asia and the Pacific region experienced soaring commodity prices, a steep hike in food prices and increased energy prices.
Ferro is of the view that rising energy prices are some sort of correction on the monetary policy side. “That is happening partly as a result of strong policy packages to support economies during Covid-19 pandemic that have resulted in some countries in some inflationary pressures, the World Bank VP noted.
