Debt levels have risen so much across Asia since the global financial crisis that they could significantly hinder regional growth, the Monetary Authority of Singapore (MAS) said yesterday.
This issue is most pronounced in China, where fresh concerns have emerged over debt reaching unsustainable levels.
For several years following the global financial crisis, low interest rates in advanced economies and easily available liquidity led to rapid debt build-up in parts of Asia, the MAS noted in its latest macroeconomic review out yesterday.
"While the flood of global liquidity helped to fuel growth, the resultant debt build-up is now unravelling at a time when commodity prices have slumped and global interest rates are set to rise."
This, combined with slowing economic activity, could result in a period of weak investment and consumption growth, said the Singapore central bank.
The increase in leverage is most pronounced in China, where debt rose largely because of a rapid build-up in corporate borrowing and Chinese policymakers' efforts to lift growth, the MAS noted.
China's total debt surged to a record 237 per cent of its gross domestic product in the first three months of the year, far above its emerging market counterparts. This raises the risk of a financial crisis or a prolonged slowdown in growth, economists have said.
Chinese debt was only 148 per cent of gross domestic product at the end of 2007.
A debt crisis in China could send shockwaves through the global economy and would have a significant impact here as China is Singapore's top trading partner.
The MAS also noted that China's growth momentum is likely to moderate further as it continues grappling with economic restructuring.
Meanwhile in South Korea, Thailand and Malaysia, household debt has also climbed significantly to around 70 to 90 per cent of gross domestic product, said the MAS.
In these, and some other Asian countries, debt service ratios in the private sectors have trended up over the past several years to levels above those seen before the global financial crisis.
"The tightening of global financial conditions in the aftermath of a credit boom in the region could pose a significant drag on growth, although the impact would vary across countries," said MAS.