How bad is Asia’s household debt?

Leslie Shaffer | @LeslieShaffer1

Udo Weitz | Bloomberg | Getty Images

Household debt across Asia is raising red flags, particularly in Thailand and Malaysia, but the official data may not capture the full picture for families around the region.
The official data can be worrying enough: Malaysia's ratio of household debt to income is 146 percent, while Thailand's is at 121 percent, based on mid-2014 data, up from 2007 pre-crisis levels of 139 percent and 93 percent respectively, McKinsey said in a report in February.
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"These debt ratios are similar to those in the United States and the United Kingdom," it said. "Given the lower income levels in those countries, this raises questions about sustainability of household debt."
Off the radar
But those figures don't provide the full picture of household indebtedness in the region, as not only are many types of debt going untallied, but it isn't clear how much debt simply moved into the formal sector.

For example, in Malaysia, the number of household borrowers from commercial banks per 1,000 adults was around 193 in 2004, but that grew to around 403 by 2013, while in Thailand, it rose to around 277 from around 143 over the same period, according to IMF data.
It isn't clear whether those households are first-time borrowers or whether they've simply moved existing debt away from traditional money lenders, such as loan sharks, who typically don't file financial reports. But there are indications that informal borrowing is common across Asia.
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Around 27 percent of Thais reported borrowing money, but only 19 percent borrowed from a financial institution and 2 percent went to an informal private lender, according to 2011 data from the Global Financial Inclusion (Findex) database, funded by the Bill & Melinda Gates Foundation. Findex plans to release updated data for 2014 later this month.
The data for other Asian countries is even starker: In Malaysia, 33 percent borrowed money, but only 11 percent borrowed from a financial institution, while in
Indonesia, 49 percent borrowed money, but only 9 percent borrowed from a financial institution.
Sustainable or not?
Whether some of the apparent growth in Asia's household debt is just a shift from the informal sector can be important for determining the sustainability of household finances as loan sharks in the region can charge annual rates exceeding 1,000 percent for short-term debt, significantly higher than microfinance and bank rates.

Amid slowing economic growth globally, how much debt gets counted isn't just an academic matter.
"There is something about debt that prevents growth," Michael Pettis, an economist and professor at the Guanghua School of Management at Peking University, said last week at the Credit Suisse Asian Investment Conference. "You cannot possibly grow once that bubble has reached a certain level where the amount of uncertainty about the resolution of debt is high enough to change behavior."
There is a lot of other debt that's not showing up in official data within Asia.
Workers often borrow from recruitment agencies to obtain placements for overseas jobs and these loans -- which can become crushing debts if the placement isn't successful -- generally aren't included in official figures. Additionally, peer-to-peer lending via the Internet is a relatively new development which may not be reported consistently.
Growing bubble?
To be sure, it isn't clear whether regional household debt has reached bubble proportions.
In Thailand, for example, household debt climbed to a record 85.9 percent of gross domestic product (GDP) by the end of 2014, data from the central bank showed Tuesday.
But the pace of growth is slowing, with household debt rising at around 5-7 percent annually, down from a 15-18 percent pace in 2011-12, DBS said in a note Wednesday.
"Concerns over household debt level require less of an immediate attention now compared to a couple of years ago," it said, noting households are deleveraging and loan-to-deposit ratios have fallen. It expects the household debt-to-GDP ratio may climb a bit further for a couple quarters until economic growth picks up toward year-end.
Others do disagree.
Leverage drove around 57 percent of Thailand's GDP growth over the past five years, Bernstein said in a note earlier this month, citing populist measure that boosted car and house financing even as GDP per capita increases were negligible.