Since the Global Financial Crisis, Southeast Asia has been one of the
world’s few bright spots for economic growth and investment returns.
With its relatively young population of 600 million and its growing
middle class, Southeast Asia has been the scene of a modern-day gold
rush as international companies clamor to get a piece of the action.
Unfortunately, my research has found that much of this region’s growth
in recent years has been driven by ballooning credit and asset bubbles –
a pattern that is also occurring in numerous emerging economies across
the globe.
In the past few months, I have published reports about the growing bubbles in
Singapore,
Malaysia,
Thailand,
the Philippines, and
Indonesia,
and I will use this report to explain the region’s economic bubble as a
whole. My five Southeast Asian country reports have generated quite a
bit of interest and controversy, and were read nearly 1.3 million times,
and were publicly denied by the central banks of
Singapore,
Malaysia, and the
Philippines.
Ultra-low interest rates in the U.S., Europe, and Japan, combined
with the U.S. Federal Reserve’s $3 trillion-and-counting quantitative
easing programs caused a
$4 trillion
torrent of speculative “hot money” to flow into emerging market
investments from 2009 to 2013. A global carry trade arose in which
investors borrowed significant sums of capital at low interest rates
from the U.S. and Japan for the purpose of purchasing higher-yielding
emerging market investments and earning the difference. The surging
foreign demand for emerging market investments created bubbles in those
assets, especially in bonds. The emerging markets bond bubble resulted
in record low borrowing costs for developing nations’ governments and
corporations, and helped to inflate dangerous credit and property
bubbles across the emerging world.
The flow of hot money into Southeast Asia after the financial crisis
caused the region’s currencies to rise strongly against the U.S. dollar,
such as the Singapore dollar’s 22 percent increase, the Philippine peso
and Malaysian ringgit’s 25 percent increase, the Thai baht and
Vietnamese dong’s 30 percent increase, and the Indonesian’s rupiah’s 50
percent increase, which has been subsequently negated now that foreign
capital has begun to flow out of Indonesia’s economy.
The post-Crisis bond bubble helped to reduce government bond yields in
Singapore,
Thailand,
Indonesia,
Malaysia, and
the Philippines (click links for charts), while foreign institutional holdings of many Asian sovereign bonds increased dramatically:
Foreign direct investment into several Southeast Asian countries
- particularly Singapore, Malaysia, and Indonesia – immediately surged
to new highs after the Global Financial Crisis.
Here’s the chart of
Singapore’s FDI (net inflows, current dollars):
Malaysia’s FDI (net inflows, current dollars):
Indonesia’s FDI (net inflows, current dollars):
How Record Low Interest Rates Are Fueling The Bubble
The emerging markets bond bubble helped to push EM corporate and
government borrowing costs to all-time lows, but there is another factor
that is causing the inflation of bubbles in Southeast Asia: record low
bank loan rates. Large corporations have a choice to borrow from either
the bond market or directly from banks, and typically choose the option
that provides the lowest borrowing costs.
Western benchmark interest rates – particularly the
LIBOR
or London Interbank Offered Rate – are used to price bank loans in
numerous countries throughout the entire world, and most have been
hovering just above zero percent in the five years since the Global
Financial Crisis. Most Western economies were hit extremely hard in the
financial crisis and have faced a constant threat of falling into a
deflationary trap since then, which is why their benchmark interest
rates have been at virtually zero. In the U.S. Federal Reserve’s case,
it has been running what is known as ZIRP or zero-interest rate policy.
Here is the chart of the
LIBOR interest rate:
Due to the fact that the West was the primary epicenter of the 2003
to 2007 bubble economy and ensuing Global Financial Crisis, emerging
market economies were able to rebound more quickly and continue growing
at a much greater rate. While many Southeast Asian economies have been
growing at a 5 percent or greater annual rate since 2008, they have been
able to borrow at record low Western interest rates such as those based
on the LIBOR. LIBOR is used as the base rate for
nearly two-thirds
of all large-scale corporate borrowings in Asia. Western interest rates
are too low relative to Southeast Asia’s economic growth and inflation
rates, so a large-scale borrowing binge has been occurring as a
side-effect. Southeast Asia’s credit bubble may balloon even larger
because Western benchmark interest rates are likely to stay at very low
levels for
several more years.
Local benchmark interest rates in many Southeast Asian countries have
hit record lows since 2008 as well. Local interest rates are used for
approximately one-third of large-scale corporate loans in Asia, as well
as most consumer, mortgage, and smaller business loans. Southeast Asian
central banks have kept their benchmark interest rates low to stem
export-harming currency appreciation that has resulted from capital
inflows since the financial crisis.
The chart below is Singapore’s benchmark interest rate, or SIBOR, which is commonly used as a reference rate for loans
throughout Southeast Asia:
Here is Malaysia’s bank lending rate chart:
The Philippines’ bank lending rate:
Indonesia’s benchmark interest rate:
Thailand's benchmark interest rate:
Southeast Asia’s Boom Is Driven By A Credit Bubble
Abnormally cheap credit conditions have led to the inflation of
credit bubbles across Southeast Asia, which have been a significant
driver of the region’s economic growth in recent years.
Singapore’s total outstanding private sector loans have soared by 133 percent since 2010:
Malaysia’s private sector loans have increased by over 80 percent since 2008:
The Philippines’ M3 money supply, a broad measure of total money and
credit in the economy, has more than doubled since 2008, and sharply
accelerated in 2013 as interest rates hit new lows:
Indonesia’s private sector loans have risen by nearly 50 percent in the past two years:
Thailand’s private sector loans have risen by over 50 percent since the start of 2010:
Though dangerous credit bubbles are inflating across Southeast Asia,
some countries’ credit bubbles are driven primarily by consumer or
household debt, while others are driven mainly by commercial sector
borrowing, particularly for construction and property development.
Singapore, Malaysia, and Thailand’s credit bubbles have a significant
household debt component as the chart below shows:
Singapore’s household debt-to-GDP ratio recently hit nearly
75 percent,
which is up from 55 percent in 2010 and 45 percent in 2005. Though
Singapore’s total outstanding household debt has increased by 41 percent
since 2010, the city-state’s household income and wages have increased
by a mere 25 percent and
15 percent respectively.
Malaysia now has Southeast Asia’s highest household debt load after its household debt-to-GDP ratio hit
a record 83 percent,
which is up from 70 percent in 2009, and up from just 39 percent at the
start of the Asian Financial Crisis in 1997. Malaysian household debt
has grown by approximately
12 percent annually each year since 2008.
Thailand’s household
debt-to-GDP ratio
also hit a recent record of 77 percent, which is up from 55 percent in
2008, and just 45 percent a decade ago. Total lending to Thai households
increased at a
17 percent
annual rate from 2010 to 2012, while household credit provided by
credit card, leasing and personal loan companies rose at an alarming 27
percent annual rate.
Property Bubbles Are Ballooning Across Southeast Asia
Ultra-low interest rates in Southeast Asia have helped to inflate
property bubbles throughout the region, which has also contributed to
the staggering rise in household debt.
Singapore’s mortgage rates are based upon the SIBOR rate discussed
earlier, which has been held at under one percent for over five years.
Singapore’s property prices have roughly doubled since 2004, and are up
by 60 percent since 2009 alone:
Source:
GlobalPropertyGuide.com
The average price of a new 1,000-square-foot condo has risen to
$1 million to $1.2 million
Singapore dollars ($799,000 to $965,638 U.S.), making the city-state
the world’s third most expensive residential property market behind
Canada and Hong Kong. A
2013 study by
The Economist
magazine showed that Singapore’s residential property prices are 57
percent overvalued based on its historic price-to-rent ratio. Singapore
now ranks as one of the world’s ten most expensive cities to live.
Economic bubbles and the resulting false prosperity in other Asian
countries have spilled over into Singapore as investors from across the
region clamor to buy properties there. In 2013,
34 percent of foreign property-buyers in Singapore were from China, 32 percent were from Indonesia, and 13 percent were from Malaysia.
Total outstanding mortgages increased by
18 percent each year over the last three years, bringing total mortgage loans to 46 percent of Singapore’s GDP from 35 percent.
Almost a third
of Singapore’s mortgages are utilized for speculative property
purchases rather than owner occupation. Singapore’s mortgage loan bubble
is one of the primary reasons why the country’s household debt has been
increasing at such a high rate in recent years.
Malaysian property prices have been increasing parabolically in
recent years, as the chart below shows. Mortgage loans account for
nearly half of all Malaysia’s household debt, and its rapid increase is the primary driver of the country’s household debt bubble.
Prices have nearly doubled in the past decade in certain Philippine
property markets, such as the Makati Central Business District (CBD):
In the first six months of 2013, the average price of a 3-bedroom luxury condominium in Makati CBD rose by a
frothy 12.92 percent
(9.98 percent inflation-adjusted), after rising 5.6 percent in Q1 2013,
8 percent in Q4 and 8.3 percent in Q3 2012. The average price of a
premium 3-bedroom condominium in Bonifacio Global City surged by 12.4
percent y-o-y, while secondary residential property prices in Rockwell
Center rose by 10.6 percent y-o-y. Philippine outstanding mortgage loans
are rising at an even faster rate than consumer credit, such as a
42 percent increase in 2012. The Philippines’ construction sector is expected to
expand by double digits in 2014 and account for nearly half of economic growth thanks in large part to the country’s property development boom.
Though Indonesian property market data is spotty and difficult to
source for all markets, Jakarta and Bali property prices are becoming
frothy, especially at the higher end of the market. Jakarta condominium
prices rose between
11 and 17 percent on average between the first half of 2012 and 2013, after rising by more than
50 percent since late 2008. Luxury real estate prices in Jakarta soared by
38 percent
in 2012, while luxury properties in Bali rose by 20 percent – the
strongest price increases of all global luxury housing markets. A small
two-room apartment on the outskirts of Jakarta can cost
nearly $80,000
USD (RM253,373), making housing unaffordable for many ordinary
Indonesians. From June 2012 to May 2013, outstanding loans for apartment
purchases
nearly doubled from IDR 6.56 trillion (USD $659.3 million) to IDR 11.42 trillion (USD $1.15 billion).
Thailand’s property bubble is centered primarily in the condo market,
which is the most common type of dwelling for Bangkok residents, and is
the speculative vehicle of choice for
foreign investors who typically hail from Singapore and Hong Kong. According to
Bank of Thailand,
condo prices soared by 9.39 percent, while townhouses prices rose by
6.86 percent in Q1 2013, after rising by similar amounts for the past
several years.
The majority of new mortgages originated are concentrated at the lower end of the Thai housing market, and Bank of Thailand
warned that low interest rate home loans could cause a property bubble.
Boonchai Bencharongkul,
a wealthy Thai industrialist, said “I think the current situation is
worrisome. As one of those who had such an experience, I can smell it
now. People are rushing and competing to buy condos while more and more
people are driving Ferraris. These are the same things we saw before the
1997 crisis occurred.”
Construction Bubbles Abound Across Southeast Asia
Low interest rates and soaring property prices create the perfect
conditions for construction bubbles, which is what occurred in Ireland,
Spain, the United States, and other countries from 2003 to 2007, and
what has been occurring throughout Southeast Asia in recent years.
Construction is a capital-intensive economic activity that benefits from
cheap and easy credit, which is certainly the case in Southeast Asia.
Southeast Asia’s construction boom has been focused on condominium and
residential property development, hotels, resorts, casinos, malls,
airports, infrastructure projects, and skyscrapers.
Construction has been the most significant contributor to Singapore’s economic growth since 2008, as the chart below shows:
Construction industry work permits
rose to 306,500
in June 2013 from 180,000 at the end-2007, which was the peak of
Singapore’s economic boom before the financial crisis hit. Singapore’s
construction boom has been driving an over
18 percent
annual increase in total outstanding building and construction loans in
recent years. Bank loans for building and construction, and mortgages
recently rose to
79 percent of Singapore’s GDP, which is up from 62 percent in 2010.
Casino and resort construction has become a strong driver of building
activity ever since gambling became legal in Singapore in 2010. The
Marina Bay Sands and Resorts World Sentosa opened in 2010 at a cost of
over $10 billion. Singapore has also been aggressively
upgrading and expanding
its Changi International Airport, which has been a driver of
construction activity. There is so much construction activity in
Singapore that the country has
306,500 construction workers (compared to its 5.3 million population) from other Asian countries living there on work permits.
After growing by over
20 percent in 2012, Malaysia’s construction spending was expected to rise by 13 percent in 2013. Malaysia’s plan to build the
tallest building in Southeast Asia, the 118-story Warisan Merdeka Tower, are a major red flag according to the
Skyscraper Index, which posits that ambitious skyscraper projects are a common hallmark of economic bubbles.
In the Philippines,
casinos,
condominiums, and
shopping malls
have been driving construction activity. The Philippines now hosts 9 of
the world’s 38 largest malls – beating even the U.S., China, and most
other developed countries. The Philippines’ construction sector is
expected to expand by
double digits in 2014, and account for nearly half of the country’s economic growth.
Indonesia has been experiencing a construction boom in
every sector,
including hotels, condominiums, infrastructure, airports, and
government buildings. At least 61 new hotels are confirmed to open in
Jakarta by 2015. Indonesian construction contracts were estimated at
more than
$40 billion in 2013, up from $32.4 billion in 2012.
Thailand’s construction boom has been centered upon condominium
development and infrastructure projects, which are funded by the
government’s deficit spending. Construction spending is expected to grow
by
nearly 7 percent annually for the next five years.
Governments Are Borrowing To Create Economic Growth
The governments of Thailand and Malaysia have been taking advantage
of low borrowing costs – courtesy of the emerging markets bond bubble –
to finance deficit spending for the purpose of boosting economic growth.
Since 2010, Malaysia’s public debt-to-GDP ratio has been at all time
highs of over 50 percent due to large fiscal deficits that were incurred
when an aggressive
stimulus package
was launched to boost the country’s economy during the Global Financial
Crisis. Malaysia now has the second highest public debt-to-GDP ratio
among 13 emerging Asian countries according to a
Bloomberg study. Malaysia’s high public debt burden led to a sovereign credit rating outlook
downgrade by Fitch in July.
Malaysia’s Malaysia's government has been running a budget deficit since 1999:
Thailand’s government spending ramped up significantly in 2012 after
the launch of a $2.5 billion first car tax rebate program that was
fraught with problems as well as an unsuccessful
rice subsidy scheme
that lost the government 136 billion baht or $4.4 billion even though
it was promoted as cost-neutral. Thailand’s government also plans to
spend
2 trillion baht
($64 billion) – nearly one-fifth of the country’s GDP – by 2020 on
growth-driving infrastructure projects, including a network of
high-speed railway lines to connect the country’s four main regions with
Bangkok. The interest alone on this new debt will cost another 3
trillion baht over the next five decades.
Thailand’s government spending is up by nearly 40 percent since 2008:
The country’s government has been running a budget deficit since 2008 to support its spending:
A wealthy Thai industrialist, Boonchai Bencharongkul,
warned against
excessive government spending, saying “This time, the nature of the
crisis might be different. Last time it was the private sector that went
bankrupt, but this time we might see the government collapse.” Sawasdi
Horrungruang, founder of NTS Steel Group, cautioned that Thailand’s
government should not borrow beyond its ability to service its debt,
which will eventually become the burden of taxpayers.
How Singapore’s Financial Sector Is Driving The Bubble
Singapore has grown to become Southeast Asia’s banking and financial
center, and the region’s rise – and inflating economic bubble – in
recent years has helped the city-state to earn the nickname “The
Switzerland of Asia.” Singapore’s financial sector is now
six times larger
than its economy, with local and foreign banks holding assets worth
S$2.1 trillion (US$1.7 trillion). The Singaporean financial sector’s
assets under management (AUM) have increased at a 9 percent annual rate
from 2007 to 2012, but surged
22 percent in 2012. The
primary reason
for the country’s rapid AUM growth is its growing role as a banking hub
in Southeast Asia, and it has been riding the coattails of the region’s
economic bubble. A full
70 percent
of assets managed in Singapore were invested in Asia in 2013, which is
up from 60 percent in 2012. Singapore’s financial services industry
grew 163% between 2008 and 2012.
Singapore’s banks have been contributing to the inflation of
Southeast Asia’s economic bubble due to their use of the abnormally-low
SIBOR as a reference rate for loans made
throughout the region.
Here is the chart of the SIBOR interest rate as a reminder of how low it has been for the past half-decade:
To learn more about Singapore’s financial sector and its role in
inflating Southeast Asia’s economic bubble, please read this section of
my detailed report about
Singapore’s bubble economy.
How China Is Driving Southeast Asia’s Bubble
Economic bubbles are not confined to Southeast Asia, unfortunately;
since 2008, China’s economy has devolved into a massive economic bubble
that has been contributing to Southeast Asia’s bubble.
Here are
a few statistics that show how large China’s bubble has become:
- China’s total domestic credit more than doubled to $23 trillion
from $9 trillion in 2008, which is equivalent to adding the entire U.S.
commercial banking sector.
- Borrowing has risen as a share of China’s national income to more than 200 percent, from 135 percent in 2008.
- China’s credit growth rate is now faster than Japan’s before its
1990 bust and America’s before 2008, with half of that growth in the
shadow-banking sector.
As mentioned at the beginning of this report, China’s government has
encouraged the construction of countless cities and infrastructure
projects to generate economic growth. Many of China’s cities, malls, and
other buildings are still completely empty and unused even years after
their completion, as these eerie, must-see
satellite images show.
China has a classic property bubble that has resulted in soaring property prices in the past several years. A
recent report
showed that property prices increased 20 percent in Guangzhou and
Shenzhen from a year earlier, and jumped 18 percent in Shanghai and 16
percent in Beijing.
China’s inflating economic bubble has generated an incredible amount
wealth (albeit much of it temporary), a portion of which has flowed into
Southeast Asia. Wealthy Chinese have been buying condominiums in
desirable locations across Southeast Asia, and its notoriously
free-spending gamblers are the primary reason for the casino building
boom in numerous Southeast Asian countries, particularly in Singapore
and the Philippines. Chinese companies have been
investing and lending heavily in Southeast Asia, with a strong focus on the natural resources sector.
From 2002 to 2012, China’s bilateral trade with Southeast Asia
increased 23.6 percent annually, and China is now Southeast Asia’s
largest trade partner, while Southeast Asia is China’s third-largest trade partner.
Though several lengthy books can be written about China’s rise,
economic bubble, and how it affects Southeast Asia, my goal is to
succinctly show how dangerous China’s economic bubble has become and
emphasize the fact that Southeast Asia’s economy has been benefiting
from China’s false prosperity. The eventual popping of China’s bubble
will send a devastating shockwave throughout Southeast Asia’s economy,
which will contribute to the ending of the region’s bubble economy.
The Role Of Southeast Asia’s Frontier Economies
This report has focused primarily on the larger, more developed
Southeast Asian countries because they have a far greater influence on
the region’s economy compared to the “frontier” economies of Vietnam,
Cambodia, Laos, and Burma (Myanmar). The five largest Southeast Asian
economies also have more advanced financial markets that are better
integrated with global financial markets, and thus pose a greater
systemic financial risk than the region’s frontier economies.
Southeast Asia’s frontier economies have been growing rapidly in
recent years for many of the same reasons as their more developed
neighbors, including:
- Rising trade with China
- Rising Chinese investment
- Increasing intraregional trade
- Loose global monetary conditions and “hot money”
- Higher commodities prices
- Credit and property bubbles
Vietnam experienced a property and credit bubble that popped several years ago and saddled the country’s banking system with
bad loans. International realty firm CB Richard Ellis
warned last year that Phnom Penh, Cambodia was experiencing a property bubble. Some local observers
have suspected
that property prices in Vientiane, Laos were in a bubble. Property
prices in Yangon, Burma have exploded higher in recent years making
commercial rents
more expensive than in Manhattan.
While relevant data is few and far between, it is not unreasonable to
believe that Southeast Asia’s frontier economies are experiencing froth
or bubbles of their own for the same reasons as larger economies in the
region. Vietnam, Cambodia, Laos, and Burma are dangerously exposed to
the eventual popping of China’s economic bubble as well as the popping
of Southeast Asia’s overall bubble.
Cracks Are Beginning To Show
Southeast Asia’s financial markets were strong performers in
late-2012 and early-2013 until news of the U.S. Federal Reserve’s QE
taper plans surfaced in the Spring of 2013, causing many of these
markets to fall sharply due to fears of reduced stimulus. This rout did
not come as a surprise to me as I had been warning that hot money flows
were inflating asset bubbles in emerging market countries, and I even
published a report titled “
All The Money We’re Pouring Into Emerging Markets Has Created A Massive Bubble”
just a few months before these markets plunged. The sensitivity of
emerging market asset prices and currencies to the U.S. Federal
Reserve’s stimulus programs was an additional confirmation that the
emerging markets bubble owed its existence largely to hot money flows.
The ultimate ending of the Fed’s current “ QE3″ program – which many
economists expect this year – is likely to put further pressure on
emerging markets and contribute to the popping of their bubbles.
While most of Southeast Asia’s financial markets and currencies have
been treading water since last Spring’s taper panic, Indonesia’s
situation has continued to deteriorate, causing the rupiah currency to
significantly weaken due to capital outflows. The rupiah is down by
nearly
50 percent from its 2011 peak. Indonesia was hit harder by the taper panic than other Southeast Asian countries because of its worsening
trade and
current account deficits.
Thailand has been embroiled in
political turmoil
in recent months as opposition protestors have been demanding the
resignation of Prime Minister Yingluck Shinawatra. Opposition members
claim that Yingluck is carrying on the same corrupt practices as her
billionaire brother, former Prime Minister Thaksin Shinawatra, who was
ousted in a military coup in 2006. The protests have harmed Thailand’s
tourism industry, which is expected to slow
2014 economic growth to half of what it would have been without the demonstrations. Thailand’s stock market has
fallen sharply in recent months as a result of the political strife.
How Southeast Asia’s Bubble Will Pop
Southeast Asia’s economic bubble will most likely pop when the
bubbles in China and emerging markets pop and as global and local
interest rates eventually rise, which are what inflated the region’s
credit and asset bubbles in the first place. Southeast Asia’s bubble
economy may continue to inflate for several more years if the U.S. Fed
Funds Rate, LIBOR, and SIBOR continue to be held at such low levels.
I expect the ultimate popping of the emerging markets bubble to cause
another crisis that is similar (though not identical in every technical
sense) to the 1997 Asian Financial Crisis, and there is a strong chance
that it will be even worse this time due to the fact that more
countries are involved (Latin America, China, and Africa), and because
the global economy is in a much weaker state now than it was during the
booming late-1990s.
I recommend taking the time to read my detailed reports on
Singapore,
Malaysia,
Thailand,
the Philippines, and
Indonesia to get a better understanding of Southeast Asia’s economic bubble.
In the coming months, I will be publishing more reports about bubbles
that are developing around the entire world – most of which you
probably never knew existed.
Please follow me on Twitter, Google+ and like my Facebook page to keep up with the latest economic bubble news and my related commentary.
By Jesse Colombo
, Forbes Contributor
I'm an economic analyst who is warning of dangerous post-2009 bubbles
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