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Decades of easy money have led to high levels of corporate debt worldwide and in Asia especially Now with the sharp rise in interest rates, businesses
– particularly small and medium-sized firms that are the backbone of economies like Hong Kong – risk defaulting on their loan
The illusion that the consequences of financial excess can be bought off by ever-increasing monetary indulgence continues to dissipate, as is evident from recent bank runs. But the worst is yet to come. These bank runs will be followed by an epidemic of corporate bankruptcies, as sure as night follows day.
Myopic financial markets have been shocked and dismayed by the collapse of SVB and Signature bank in the US, plus the implosion of Credit Suisse, and they will be equally caught off guard when the impact of interest rate hikes on overborrowed business corporations bursts into the open.
This is a particular hazard in Asia where levels of corporate – and in some cases household – borrowing have soared in recent years to match or even overtake government indebtedness.
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Last year, Asean+3 Macroeconomic Research Office, a macroeconomic surveillance organisation, noted that the increase in non-financial corporate debt in the Association of Southeast Asian Nation members as well as China (including Hong Kong), Japan and South Korea since the global financial crisis “had intensified risks to financial stability that were subsequently exacerbated by the Covid-19 pandemic”. And that was before inflation came along.
The debt of global non-financial companies was US$88 trillion at the end of 2021 when it exceeded the value of global gross domestic product for the first time. It eased slightly in 2022 but since then things have taken a turn for the worse where dealing with the burden of debt is concerned.
This is because interest rates have surged over the past year from the near zero (and sometimes even negative) levels they were reduced to in the wake of the 2008 global financial crisis by central banks desperate to stave off a repeat of the Great Depression.
As the IMF noted in 2021, “Easy financial conditions in the aftermath of the Global Financial Crisis of 2008-09 have been a key driver of the rise in leverage in both advanced and emerging market economies.”
Since March last year, the US Federal Reserve has been raising its benchmark overnight borrowing rate, which now stands at between 4.75 and 5 per cent. Many central banks in both advanced and emerging economies where actions are effectively dictated by Fed policy have followed suit by also raising rates.
As veteran financial analyst Jesper Koll put it during a recent event that I moderated at the Foreign Correspondents Club of Japan in Tokyo, “Bad things happen when interest rates rise.” They do indeed.
Debt service costs rise – for households, corporate borrowers and governments. Mortgage payers can then lose their homes and businesses – small and medium-sized enterprises especially – face the risk of going bankrupt.
Rose Rambles... 