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Emerging Markets, IMF editions, October 2015

HSBC has added its voice to the growing chorus of concern about a credit crunch in emerging markets. Yesterday, after Emerging Markets reported on growing fears about negative capital flows into the emerging world, HSBC economist Frederic Neumann warned of a “structural growth problem” and a “debt squeeze.”

“These are clearly challenging times,” Neumann said. “The last three months have seen enormous volatility in Asian markets, not just FX but equity markets, and growth numbers are disappointing.”

He said there were two aspects to the structural growth problem. “Domestic demand continues to weaken because credit growth has been slowing over the last few years. Domestic demand has been exceedingly credit dependent, and as credit growth slows this is weighing on investment and consumption, not just in China but in Asean, and places like Korea and Taiwan.”

The other, he said, was that “exports are not really firing up despite better growth data in the US and Europe,” largely because a weaker China has constrained overall Asian growth.

Neumann warned against over-reaction. “The good news is this is not a 1997 scenario, as you might read in the newspapers. Asia still has very strong fundamentals,” including manageable debt ratios, current account surpluses across the region, and accommodative global interest rates. “This is not going to lead to a financial road accident like in the 1990s. [There will be] Weaker growth, we need to bring down our expectations, but we will be standing at the end of the day.”


Neumann was speaking after HSBC put out its fourth quarter economic outlook for Asia, entitled “Asia’s debt squeeze.” The report concludes: “Financial market jitters and debt saturation are putting a brake on credit-fuelled growth.”


The report adds: “Asia’s debt squeeze reflects as much about the concerns over a strengthening US dollar and a Fed ready to hike rates as it does fears that China could trip up.” However, it distinguished between a squeeze – with slowing credit growth impacting overall demand – and a crunch. “An outright debt crunch – a vicious deleveraging cycle plunging the region into prolonged contraction – is still the less likely outcome.”


The report concluded that Asean economies are particularly exposed to a debt squeeze, for various different reasons. Malaysia’s currency has declined, which will push up funding costs. “With demand more credit dependent than elsewhere, this is bound to weigh on growth,” the report says. Singapore and Indonesia are also grappling with tighter financial conditions, HSBC says, though Thailand and the Philippines are less exposed.


The only bright spot in the report is the improvement in Asia’s smaller economies. “Sri Lanka, Bangladesh and Vietnam look set to push growth higher still, snapping at China’s heels – if not quite in size than in the pace of their expansions,” the report says. HSBC projects full-year 2015 growth of 6.1% for Asia ex-Japan, and 6.2% in 2016; despite Neumann’s bearish tone, both of these projections are above consensus estimates of 5.9% and 6% respectively, largely because of HSBC’s unusually positive view on China.

Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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