Asia’s increased borrowing in recent decades has augmented the region’s exposure to rising interest rates and heightened market volatility.
Borrowing by the region’s governments, companies, consumers, and financial firms is well above levels prior to the global financial crisis, as we recently noted. In particular, industries that rapidly increased leverage while interest rates were low are now a key concern, especially in Asia. While we expect Asia’s growth to hold up, contributing two-thirds of global growth this year, central banks may keep rates higher for longer to tame inflation, and financial conditions may tighten further.
Highly leveraged companies face greater risk of default as monetary policies and financial conditions remain tight. Even with resilient economic growth, interest payments may exceed earnings as borrowing costs rise, reducing firms’ ability to service their debts.
As the Chart of the Week shows, corporate debt in Asia is concentrated in firms with low interest coverage ratios. When this ratio, a measure of how much corporate earnings can cover debt interest payments, is below or close to 1, a firm may become unable to service its debts.
As of mid-2022, 17% of Asia’s corporate debt was held by firms with interest coverage ratios below one, and another third in firms with interest coverage ratios between one and four.
China, India, and Thailand had greater concentrations of corporate debt in firms with interest coverage ratios below one, a level signaling susceptibility to default. The Philippines, Malaysia, and Hong Kong had large shares of debt in companies with coverage ratios just above one, which could potentially become susceptible to default with rising borrowing costs. Across the region, a common theme is that a significant share of firms in the property and construction sector have interest coverage ratios close to or below one.
Cash buffers built up in recent years can provide a temporary reprieve against increasing interest rates, but may prove insufficient if borrowing costs remain higher for longer. Across the region, cash holdings are generally lower in firms with low interest coverage ratios, which are already more exposed to rising borrowing costs; in India, Indonesia, and Vietnam, cash holdings of such vulnerable firms are especially low relative to interest costs, leaving them at risk of insolvency.
In addition, given high shares of short-term debt in Asia, even firms with ample stockpiles of cash may face severe pressures should credit conditions tighten and reduce availability of short-term loans.
Financial stability focus
The IMF monitors the evolution of these risks amid the prospect for higher for longer interest rate environment or a potential tightening of credit and financial conditions in the region. We recently visited the Philippines to join the central bank in hosting a conference on financial stability for Asia’s policymakers.
Our gathering in Cebu, on the sidelines of a Financial Stability Board–Regional Consultative Group for Asia conference, convened regional central bankers and regulators to discuss systemic risk issues in the region and how to address them amid global bank stresses. Regional corporate debt vulnerabilities were part of the discussion.
Financial supervisors must remain vigilant amid elevated uncertainty, high debt burdens, and rising debt service costs, and should recalibrate relevant macroprudential tools as needed to tackle pockets of vulnerability in the corporate sector. At the same time, central banks should separate monetary policy objectives from financial stability goals, using specialised tools such as liquidity and lending facilities to safeguard financial stability, while continuing to calibrate monetary policy to address inflationary pressures.
Thomas Helbling is a Swiss national and deputy director in the Asia Pacific Department of the International Monetary Fund. In this function, he oversees the department’s work on China, Korea, and Mongolia, and on regional issues. Previously, he was the mission chief for Mexico in the Western Hemisphere Department and mission chief for Indonesia and the Philippines in the Asia Pacific Department. He has worked on a wide range of issues and countries since joining the IMF in 1994. From 2012-15, he was the chief of the World Economic Studies Division, co-directing the work on the IMF’s World Economic Outlook. From 2016-19, he was the chief of the Australia-New Zealand Division and mission chief for both countries.
Shanaka J. Peiris
Shanaka Jayanath (Jay) Peiris is the Asia and Pacific Department’s Division chief of Regional Studies and mission chief for the Philippines, leading the flagship publication of the Regional Economic Outlook. He was previously IMF mission chief for Myanmar and deputy division chief covering ASEAN macro financial surveillance. His prior stints include IMF resident representative in the Philippines, mission chief to Tonga, and extensive surveillance and program experience in Asia and Africa.
Monica Petrescu is an economist in the IMF's Asia and Pacific Department, where she works on the Regional Economic Outlook. She joined the IMF in 2019, and has since worked on Jordan, the Republic of Congo, Vanuatu and debt sustainability issues. Her research focuses on corporate finance, financial stability and market microstructure.