Over 20 years since the Asia debt crisis of 1997 devastated the region and as the last tremors of 2008 global financial crisis still echo, global management consulting firm
McKinsey & Co observes that the warning signs of a new crisis in Asia are "ominous".
According to the consulting firm, three fundamental signs of stress seems to be building throughout Asia. These include rising debt, dependence on banks and shadow-banking institutions, and fall in capital inflows.
First, in the real estate sector, corporations across the region are under significant stress to fulfill their debt-service obligations, it said, adding that households in Australia and South Korea have accumulated unsustainably high levels of debt.
Second, the Asian financial system shows vulnerability with lower margins and higher risk costs, especially in emerging markets and continued dependence on banks and non-banking finance companies (NBFCs) for lending could be challenged materially, it noted.
Third, it said that the global cross-border capital inflows have been down overall from their 2007 peak. However, it added that inflows into Asia have surpassed pre-crisis levels, resulting in a dramatically larger share of foreign inflows into the region.
"Whether cumulatively these conditions are enough to trigger a new crisis remains to be seen, of course. Since 1997, financial regulators have become wary and safeguards have been put in place. Yet, governments and businesses need to monitor potential triggers carefully, like defaults in repayment of debt, liquidity mismatches, the impact of higher interest rates, or large fluctuations in exchange rates, and take adequate preventive action," McKinsey explained.
The consulting firm assessed the balance sheets of more than 23,000 companies across eleven Asia-Pacific countries and found firms in most of Asia has more long-term debt obligations. In 2017, Australia, China, Hong Kong, India, and Indonesia the share of companies with long term debt has increased materially since 2007 while falling sharply in the US and UK during the same period.
It added that cracks are appearing again in the Asian financial system as returns have declined consistently. In addition, capital markets remain underdeveloped, and borrowers rely heavily on banks and non-bank intermediaries for financing.
The growth in lending by non-bank intermediaries, especially in China and India, also generates greater risks, the global consulting firm observed.
In 1997, the Asian financial crisis was partly triggered when merchant banks in South Korea were caught in a severe credit squeeze. The country’s 30 merchant banks were heavily exposed to troubled companies, undercapitalized, and holding significant foreign-currency liabilities. When some of their clients went bankrupt, a vicious cycle was unleashed: foreign and domestic banks refused to lend to the merchant banks, and the merchant banks were forced to call in loans, triggering further defaults.
In India, while banks reduced lending as defaults showed signs of growing around 2014, non-bank financial intermediaries continued to lend, McKinsey said. The Reserve Bank of India (RBI), India’s central bank, estimates that 99.7 percent of
NBFCs and housing finance companies make long-term loans against short-term funding. As they are dependent largely on wholesale funding, any failure to make payments as debt instruments come up for redemption can trigger a crisis.
It finally said: "While our analysis suggested no evidence of immediate risk, global asset-price bubbles are another potential stress factor."
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