Monday, January 26, 2015

Plunging Oil Prices, Rising Debt Leaves Asia Staring at Deflation: Morgan Stanley


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Asia’s rapid accumulation of debt in recent years is holding back central banks from easing monetary policy to fight the risk of deflation, endangering private investment needed to boost faltering growth, according to Morgan Stanley. Debt to gross domestic product ratio in the region excluding Japan rose to 203 percent in 2013 from 147 percent in 2007, with most of the increase led by companies, analysts led by Chetan Ahya in Hong Kong wrote in a report today. The ratio is close to or has exceeded 200 percent in seven of 10 nations including China and South Korea, they said.
Deflation risk is spreading from Europe to Asia as oil prices plunge, raising the specter of companies and consumers postponing spending and threatening a recovery in the global economy. Asia could take its cue from the U.S. where a policy of keeping real rates low after the 2008-2009 global financial crisis encouraged private-sector investment and boosted productive growth, Morgan Stanley said.
“When real rates are high, only the public sector or government-linked companies will take on leverage,” the Morgan Stanley economists wrote in the report. The key concern with an approach of keeping real rates at elevated levels is that the private sector will continue to be hesitant to take up new investment, which is critical for reviving productivity, the report said.
Asia’s policy makers are balancing the need to support domestic demand and curbing debt and asset bubbles. While China cut its one-year lending rate in November, its policy makers have held off on broader easing measures as they sought to avoid exacerbating a build-up in nonperforming loans.
Leverage in the region picked up sharply from 147 percent of GDP in 2007 to 203 percent of GDP in 2013. Seven out of ten economies in the region now have debt to GDP ratios close to or above 200 percent (only India, Indonesia and Philippines have ratios well below 200 percent), a level that warrants close monitoring in our view. Deflation: The weak domestic demand growth and issues related to growth mix have meant that the region continues to face entrenched disinflation pressures. In the context of a high debt stock almost all across the region, the rising deflation risks have compounded the challenges of debt management by pushing down nominal GDP growth and pushing up real rates
Oil prices that were over $100 in July 2014 are currently trading at around $48. According to a report byBloomberg, the deflation risk is spreading from Europe to Asia. The risk is reportedly raising concerns about companies and consumers postponing their expenditure. Such a scenario may make the global economic recovery difficult. The central banks in Asia are reportedly finding it difficult to follow an easy monetary policy. The report cites an analysis by Morgan Stanley that says companies in Asia have accumulated a lot of debt over the past few years. The huge debt may be stopping central banks in the region to take steps to contain deflationary risks in their respective economies.
 India, South Korea, Indonesia, Thailand and the Philippines have reportedly kept the interest rates unchanged in the last month. China has cut its lending rate, but the country is reportedly holding back from taking more monetary measures for fear of increasing non-performing assets of banks. Most Asian countries are major importers of oil. The fall in the commodity's price in the past few months is expected to push prices down in the region. But slow economic growth and deflationary risks are a cause for concern for investors. The Asian Development Bank has reportedly cut the growth forecast for the region for 2014 and 2015.
With oil slumping, Singapore’s consumer prices fell in November from a year earlier for the first time since 2009, while price gains in Thailand eased to the slowest pace in December in more than five years. To allay concerns on leverage, China could tighten rules to allow faster recognition of non-performing debt in the corporate sector, Morgan Stanley said. While this could lead to a period of sharper slowdown in credit and GDP growth, it will reduce risks and open up the door for aggressive monetary as well as fiscal easing, it said.

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