A new research note from Merrill Lynch’s Asia-based economist TJ (Tim) Bond, highlighting Asia’s relatively calm waters in the broader credit storm, has generated some interest in relevant quarters outside the region.
Global credit markets are in trouble, he notes, but there are few signs of a credit crunch in Asia.
True, spreads on offshore bonds have widened. But these instruments only account for 4 per cent of outstanding Asian credit, he notes. Bank credit is by far the largest source of funds for domestic consumers and firms. Loan growth is picking up, and lending rates are falling in both real and nominal terms.
In sum, he says, many markets are globalised, and subject to contagion as the US credit cycle turns down. But the market for domestic bank credit is not.
It is denominated in local currency. Both volume and price are responsive to trends in domestic monetary policy. And bank credit is the most important source of funds for Asian consumers and firms. As domestic borrowing costs fall in real terms, this supports our view that Asia stands at a very different point in its investment and credit cycle compared to the US.
Interestingly, another recent note from Merrill - this time from Takuji Okubo, Merrill’s Japan economist - asks if there are any signs of the broader credit crunch hitting Japan. While credit conditions are tightening at the margin, conditions in the bank loan market - “by far the most important source of funds for domestic consumers and firms” - haven’t changed much at all.
On the contrary, banks are well capitalised, remain willing to lend, and have not experienced the same
funding pressures faced by their offshore peers. His conclusion is that credit is indeed becoming less abundant, but visible market indices such as CDS spreads, and the Libor spread tend to overstate the degree of tightening, and that financial conditions in Japan remain “relatively easy”.
We saw an example last week of Japan’s reasonably healthy appetite for leveraged finance, as FT Alphaville noted on Friday, with Permira and its partner IEIL completed the financing ahead of schedule on the biggest LBO deal of 2007 - the takeover of agrochemicals producer Arysta LifeScience.
Sure, says Okubo, relative funding costs have risen somewhat in Japan, but the majority of Japan’s banks are still taking an expansionary attitude in their lending, both towards large and small-sized corporate borrowers.
“The days of bad debt are over and Japanese banks are sufficiently well-capitalised,” he adds. While credit spreads have certainly widened, their impact on the real economy is relatively small.
Bond arrives at exactly the same conclusions for the rest of Asia. So while credit spreads on dollar-denominated bonds have widened, offshore bonds constitute only 4 per cent of the Asian credit market. Credit financing is dominated by banks, which account for 67 per cent of the market.
On average, bank lending rates have declined in nominal terms since the global credit crunch hit, as Fed easing dragged Asian interest rates lower. The decline has been even more significant in real terms - inflation has risen by 175bp over the same period. The cost of funds, meanwhile, has also fallen.
Asian banks are “not experiencing the funding pressure faced by their global counterparts”, adds Bond. (”Two key exceptions are China - due to domestic monetary tightening, and Korea - due to heavy-handed changes in domestic regulations, rather than spillover effects from global markets”).
Loan growth is actually picking up, driven by Indonesia, Hong Kong, and Singapore. India is the only country where domestic credit is slowing (after three years of strong growth). Clearly, the credit upturn could lose strength as economic growth slows in 2008, but there’s simply no evidence of a sharp contraction. Finally, the unwinding of securitisation carries little risk for Asia, Bond notes - not least because the market for securitised assets in Asia is tiny.
For those who believe in that horrible word, “decoupling”, it’s all thankfully far far away from the gloom and dooming roiling US and European markets.
