Abu Dhabi, UAEFriday 15 November 2019

Threat of another Asian debt crisis rises with repayment stress, McKinsey says

The global consultancy’s warning shot to markets comes as a slowing global economy puts pressure on earnings at Asian companies

In Singapore the electric cars made by Tesla are not regarded as environmentally appropriate. Getty
In Singapore the electric cars made by Tesla are not regarded as environmentally appropriate. Getty

More than two decades since the Asia debt crisis gripped the region, global consulting company McKinsey is saying that signs of a rerun are "ominous".

Increased indebtedness, stresses in repaying borrowing, lender vulnerabilities and shadow banking practices are some of the concerns cited by McKinsey in an August report. Whether building pressures are “enough to trigger a new crisis remains to be seen” but governments and businesses need to monitor potential causes, authors Joydeep Sengupta and Archana Seshadrinathan wrote.

McKinsey’s warning shot to markets comes as a slowing global economy puts pressure on earnings at Asian companies, and the US-China trade war makes debt investors more risk averse. Still, fund managers point to improved credit metrics of Asian dollar bond issuers in recent years, and Moody’s Investors Service said last week it expects most Asian economies can offset the domestic impact of the global slowdown through monetary and fiscal policy measures.

McKinsey examined the balance sheets of more than 23,000 companies across 11 Asia-Pacific countries, and found companies in most of Asia face “significant stress” in servicing debt obligations. In countries such as China and India, those pressures have risen since 2007, while falling sharply in the US and UK during the same period, according to McKinsey.

The analysis looked at the share of long-term debt held by corporations with an interest coverage ratio of less than 1.5 times. At these levels, corporations are using a predominant share of their earnings to repay their debt, according to the study.

In 2017, in China, India and Indonesia, more than 25 per cent of long-term debt was held by companies with a ratio of less than 1.5, it said.

Since 1997, financial regulators have put in place safeguards to prohibit a repeat of the crisis that engulfed Thailand, Korea, Indonesia and several other Asian nations and had long-lasting repercussions. Potential triggers of a crisis that need to be monitored include defaults in repayment of debt, liquidity mismatches, and large fluctuations in exchange rates, according to McKinsey.

Updated: August 20, 2019 01:03 PM

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