Wednesday, June 13, 2007
How Is Your Credit?
Came across this in the highly reputable (and bloody expensive) Bank of International Settlements publication. The chart on the right is very interesting. It looks at per capita credit card balances. Korea went havoc in 2000-2003 and the jump then was hard to understand but it was like a battle cry among the consumers to spend more aggressively in order to get the Korean economy out from the Asian financial crisis. There was a rallying cry and it showed what people can do if they acted as one.
Economists tend to believe that every individual act for its own good - the Korean experience would have sent economists revising that line of belief. The Korea economy in that 3 years basically spent its way out of a recession, and it was the first country to come out of the Asian financial implosion. Instead of relying on the government to pump up the economy. The Korean public, either knowingly or unknowingly, rescued their own economy. What was even more surprising was they consumerism binge tapered off after the economy recovered, and not vice-versa. Korea has now managed to reduced their credit card outstanding balances significantly now that things are rosy again. This is a phenomenon worth studying over and over again. How to spend your way out of a recession. Of course the binge was not all due to the public deliberateness but also a confluence of factors such as bank's strategy and government's policies in allowing certain leeways to boost the economy. Having said that, the binge also has its consequences. The credit balances went to as high as 15% of Korea's GDP (compared to US' 7% of GDP) and was unsustainable. What followed in 2004-2006 was tighter lending by banks and also more bad debt being written down.
HK is steady and their per capita balances are highest but also its a reflection of their per capita income. Cannot run away from the link. You earn US$5,000 a month you have US$500 in credit card balances. You earn US$15,000 a month you will have US$5,000 in credit card balances. Its like that in life. The countries where growth in consumer finance has been the greatest were at HK, Korea and Taiwan. Following the Asian financial implosion, the loans to deposit gap has narrowed substantially, forcing banks to seek out other growth areas aggressively. Consumer finance was a big target. The growth was exceptional in Taiwan as well and credit card balances did reach a 9% of GDP in 2005, which was a big worry. Banks began to tighten and write down bad debts since then.
Singapore, Thailand and Malaysia are not in any trouble. It showed good restraint and planning from their monetary authorities and central banks. It also points to the level of lending standards being enforced. It also points to the level of asset quality and the risk inherent. Credit card balances is a big indicator on the "real consumerism aggressiveness" of each inherent economy - it indicates the multiplier effect when the country does well, and also the severe contraction when things go awry.
Per capita card balances has to be put side by side to per capita income of each country to make it meaningful. Putting credit balances as a percentage of total household loans would be even more meaningful as it takes into account country specific factors.
Credit Card Balances As A Percentage Of Total Household Loans
1) USA 37% (gulp!)
2) Taiwan 15%
3) South Korea 11% (during the 2002-2003 crazier times, that figure went to a ballistic 45%)
4) Thailand 14%
5) HK 8.2%
6) Japan 6.6%
7) Malaysia 6.1%
8) Singapore 2.1%
From that angle, HK's figure is not that bad. Taiwan's going through some tough times now in consumer finance downturn and tightening, bound to get worse before better there. Thailand's figure looks bad and this would put enormous pressure should the economy there goes into a slow down. Japan's figure is surprisingly high compared to historical trends - the main factor could be the very low deposit rates and the correspondingly not so high credit card interest rates (e.g. deposit rates at 0.5%, banks would be charging only 1.5%-2.0% on credit card balances there).
Singapore's figure is very low. I think that's not due to better cash management but rather the efficient link-ups of your credit to your CPF to your ID to your employment records to your passport to your asset file to your army records to your academic records - you don't want to fuck up anywhere along the chain line.