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Rising Household Debt: Implications for
Macroeconomic Stability
Presentation at Bank of Thailand Symposium 2014
October 17, 2014
Athiphat Muthitacharoen, PhD SCB Economic Intelligence Center
Phacharaphot Nuntramas, PhD SCB Economic Intelligence Center
Pasit Chotewattanakul Bank of Thailand
Disclaimers: Views and opinions expressed in this presentation belong to the authors and should not be interpreted as those of Siam Commercial Bank PCL. or Bank of Thailand.
Thailand’s household debt has been rising fast and is now at the level of rich countries
2
Thailand’s household debt has been rising fastest in the region during the last 3 years..
Household debt in % of GDP, Change in percentage point (2010vs.2013)
..and it is currently at level similar to the rich countries
Household debt in % of GDP, 2013
Source: CEIC
6 10
47 56 59 60
75 83 83 85 87
92 96
119
Jap
an
Ph
ilip
pin
es
Sin
gap
ore
Ge
rman
y
Ital
y
Sou
th A
fric
a
Ind
on
esi
a
New
Ze
alan
d
Thai
lan
d
UK
US
Au
stra
lia
Ko
rea
Mal
aysi
a
1.0
1.8
3.5
5.0
12.1
13.4
19.3
Philippines
Indonesia
Australia
Korea
Malaysia
Singapore
Thailand
At household level, the high indebtedness among low-income households is particularly worrying
3
Average DSR by income quintiles, 2009-2013
Unit: Percent
Notes: Dropping observations with unreasonably high DSR values (DSR > 1000%). (9 such observations in the 2013 dataset) Source: SES
24242428
49
28232325
29
47
28232325
29
49
27
Second quintile Third quintile First quintile All Fourth quintile Fifth quintile
2013 2009 2011
54% of Thai Households are Indebted
Debt Service Ratio (DSR)
Principal payment
Interest payment
Income
Poorest households
<9 9-14 14-21 21-33 >33 Income Brackets (Thousand baht)
Richest households
How could the large build-up of household debt be dangerous to the economy?
4
Short-term risk to financial stability
Rising Household Leverage
Restrain economic activity
Reduces shock absorber and increases economic volatility
Lower households’ disposable income and constrain credit access
The risks may not be equal across all lenders
Subjects banks to higher exposure towards household sector
Research Questions, Model Strategies and Data Construction
5
Debt at Risk Does the rising debt
increase short-term risk to financial stability?
Research Questions Model Strategies
1
Research Questions, Model Strategies and Data Construction
6
Debt at Risk Does the rising debt
increase short-term risk to financial stability?
Research Questions Model Strategies
1
Regression Analyses To what extent, does the debt surge hurt
consumption?
2
Research Questions, Model Strategies and Data Construction
7
Debt at Risk Does the rising debt
increase short-term risk to financial stability?
Research Questions Model Strategies
1
Regression Analyses To what extent, does the debt surge hurt
consumption?
2
Microsimulation How big is the threat associated with the potential rate hike?
3
Research Questions, Model Strategies and Data Construction
8
Debt at Risk Does the rising debt
increase short-term risk to financial stability?
Research Questions Model Strategies Data Construction
SES Surveys: 2009, 2011 and 2013
BOT’s supplemental survey to SES 2013Q1. It contains questions about household’s debt-servicing difficulties.
Best available resources on income and debt for Thailand’s middle- and low-income households
Allows focusing on the evolving structure of Thailand’s household debt instead of cyclical effects
1
Regression Analyses To what extent, does the debt surge hurt
consumption?
2
Microsimulation How big is the threat associated with the potential rate hike?
3
• Does the rising debt increase short-term risk to financial stability?
• To what extent, does the debt surge hurt consumption?
• Policy Implications
– How big is the threat associated with the potential rate hike?
– How do we live with highly leveraged households?
Agenda
9
US experience suggests that distribution of debt matters
10
US mortgage credit growth for house purchase by credit-score zip codes, 1999-2006 Unit: Index (1999 = 100)
Source: Mian and Sufi (2014)
There was an aggressive credit expansion among marginal borrowers in the years preceding the Great Recession
Debt growth has been higher among groups perceived as having lower risks
11
Debt growth (2013 vs. 2009) by education groups
Annualized growth rates (%)
Source: SES
Debt Share 64% 36%
6.16.2
3.2
5th quintile 4th quintile Bottom 3 quintiles
Debt growth (2013 vs. 2009) by income groups
Annualized growth rates (%)
Debt Share 17% 18%
2013 Income 0-21,000 21,000-33,000 >33,000
65%
11.4
3.0
College and above
No college
Higher debt growth among middle-income groups
The expansion of credit among middle-income groups also results in increasing shares of those with moderate debt-servicing burden
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Distribution of debt by DSR groups Unit: %
Source: SES
35% 35% 34%
32% 36% 37%
15%16% 15%
6% 5% 7%11% 6%8%
100%
60%<DSR<=80%
DSR <= 20%
20%<DSR<=40%
40%<DSR<=60%
DSR>80%
2013 2011 2009
Rising share of debts among households with moderate DSR level
What determines households’ financial vulnerabilities?
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Financial Vulnerabilities
Lifetime income
Occupation
DSR
Assets
Age
Probability of Debt-Servicing Difficulty
Probit Model
The “Debt at Risk” measure summarizes the health of our stock of household debt
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Debt concentrated among high-risk households
Debt (baht)
Prob. Debt at Risk (baht)
A 80 50% 40
B 20 10% 2
Debt at Risk (% of total) 42%
1 Debt concentrated among low-risk households
Debt (baht)
Prob. Debt at Risk (baht)
C 20 50% 10
D 80 10% 8
Debt at Risk (% of total) 18%
2
Each household
Debt at Risk (DAR)
Outstanding debt
Probability of Debt-Servicing Difficulties
Summing DAR across households
Aggregate DAR
Aggregate Debt at Risk has been declining gradually since 2009
15 Source: SES
Recent surge in household debt has NOT been associated with an
increase in short-term risk to financial stability
1
Debt at Risk, 2009-2013 % of total debt
20.4
22.3
2011 2013 2009
23.4 Debt has been less
concentrated among risky households
28
18
28
1615
GHB&GSB Comm. Banks
Village Funds
Savings Co-Op
BAAC
Debt at Risk across different lenders, 2013
Unit % of Total Debt
Debt Share 22% 18% 14% 11% 11%
Not all lenders are equal in term of short-term risk to financial
stability
2
• Does the rising debt increase short-term risk to financial stability?
• To what extent, does the debt surge hurt consumption?
• Policy Implications
– How big is the threat associated with the potential rate hike?
– How do we live with highly leveraged households?
Agenda
16
Although the surge in debt does not increase short-term risk, it can restrain economic growth
17
Rising Household Leverage
Restraining Economic Activity
By Restricting
Consumption
Higher debt repayment burden
Less access to credit
More financially vulnerable
17
Thailand experienced a wide variation of debt growth from 2009 to 2011
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Change in DSR by provinces from 2009 to 2011
Source: SES
27
-23
-1Medium debt growth
High debt growth
Low debt growth
Splitting Thai districts into 3 groups based on their DSR increase
Average change in DSR (Percentage point)
เชียงราย
เชียงใหม่
แม่ฮ่องสอน
กาญจนบุรี
ราชบุรี
พะเยา
น่าน ล าปาง
ล าพูน
ตาก
แพร่ อุตรดิตถ์
สุโขทัย
ก าแพงเพชร พิจิตร
พิษณุโลก
เพชรบูรณ์
นครสวรรค์ อุทัยธานี
ลพบุรี ชัยนาท
เลย
หนองคาย บึงกาฬ
นครพนม
สกลนคร อุดรธานี
หนองบัวล าภู
ขอนแก่น
ชัยภูมิ
นครราชสีมา
บุรีรัมย์ สุรินทร์ ศรีสะเกษ
ร้อยเอ็ด
ยโสธร
มุกดาหาร
อ านาจเจริญ
อุบลราชธานี
มหาสารคาม
ปราจีนบุรี
สระบุรี
กาฬสินธ์ุ
นครนายก
กรุงเทพมหานคร สมุทรปราการ
สมุทรสาคร สมุทรสงคราม
นครปฐม อ่างทอง
นนทบุรี สิงหบุรี
อยุธยา ปทุมธานี
สุพรรณบุรี
สระแก้ว ฉะเชิงเทรา
ชลบุรี
ระยอง จันทบุรี
ตราด
เพชรบุรี
ประจวบคีรีขันธ์
ชุมพร
ระนอง
พังงา
ภูเก็ต กระบี่
สุราษฏร์ธานี
นครศรีธรรมราช
พัทลุง ตรัง
สตูล สงขลา
ปัตตานี
ยะลา นราธิวาส
Greater DSR increase
We use this variation in DSR increases across 776 districts to examine the effect of debt acceleration on consumption during the
subsequent period.
The acceleration of debt burden represents the key impediment to consumption growth
Note: *The predicted mean is computed using average values of DSR increases in each district group.
Source: SES
Low debt growth
7.8
Medium debt growth
6.7
High debt growth
5.4
The income growth of 10% yields the consumption growth of:
Illustration of the regression results
Our analysis shows that recent weakness in consumption is closely related to lagged acceleration of household debt
The coefficient on lagged DSR increase is negative and statistically significant.
Regression Analysis Result Predicted mean of non-durable consumption growth*
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When is household leverage financial burden to Thai households?
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Predicted probability of having debt-servicing difficulty
The critical DSR threshold is 40%. Above this level, households in all occupations exhibit a significant increase in the probability of having difficulty paying their debt.
Source: SES
23
2423
21
27
2928
25
35
3735
3334
3534
32
37
3837
34
20
25
30
35
40
Agri bus Salaried Retired Non-agri bus
DSR<20% DSR>=80% 20%<=DSR<40% 60%<=DSR<80% 40%<=DSR<60%
Who are these financially vulnerable households?
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Not necessarily poor people Concentrated in the Northeast
Have less liquid asset cushion but more fragile income
Source: SES
24%
20%
18%
19%
19% Q1
Q2
Q3
Q4
Q5
Poorest
Vulnerable households by income quintile
Unit % of Total
3% 13%
21%
54%
9% Bangkok
Central
North
Northeast
South
Vulnerable households by region
Unit % of Total
Vulnerable Not Vulnerable
Median liquid asset coverage
Share of fragile income
4.8 16.8
73% 58%
• Does the rising debt increase short-term risk to financial stability?
• To what extent, does the debt surge hurt consumption?
• Policy Implications
– How big is the threat associated with the potential rate hike?
– How do we live with highly leveraged households?
Agenda
22
We construct a microsimulation model to help assess the impact of the interest rate hike on households’ financial health.
Microsimulation Framework
Income Debt expense
Heterogeneous income growth across households Assume average income
growth consistent with BOT’s projected GDP growth
Allow variance of income growth to differ across income groups
Interest rate = MRR + Risk premium
Debt with fixed rate:
Consumption, Mortgage, Non-BACC Agriculture
Debt growth as function of income growth Construct a pseudo-panel
dataset with 48 household clusters based on education, age, occupation and location
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24
Share of variable-rate debt
Q1 27%
Q5 11%
2.0%
Q4 Q5
2.1% 2.3%
2.9%
Q3
4.4%
Q1 Q2
Notes: 1. The microsimulation uses 2013Q1 SES observations as the base dataset. 2. Indebted households only Source: SES
Increase in average DSR by income quintiles Unit: Percentage point
Poorest households
Richest households
Our microsimulation indicates low-income households will be more burdened by the interest rate hike.
<9 9-14 14-21 21-33 >33 Income Brackets (Thousand baht)
25
Q2 Q3
3.3%
1.3%
Q4
3.1%
Q5
2.5%
3.7%
Q1
Notes: 1. The microsimulation uses 2013Q1 SES observations as the base dataset. 2. Indebted households only Source: SES
Increase in share of financially vulnerable households
Unit: % of indebted households
The rate hike will also threaten households who are “almost” financially vulnerable to begin with
Share of “almost” vulnerable households
Q1
4.8% Q5
3.0%
Poorest households
Richest households
<9 9-14 14-21 21-33 >33 Income Brackets (Thousand baht)
• Does the rising debt increase short-term risk to financial stability?
• To what extent, does the debt surge hurt consumption?
• Policy Implications
– How big is the threat associated with the potential rate hike?
– How do we live with highly leveraged households?
Agenda
26
Living with highly leveraged households
27
Falling prices and
wages
Debt repayment takes larger share of income
Spending falls
Stagnant economy
Be vigilant on debt deflation
Monetary Policy • Keep inflation expectation
steady.
• Deflation could be as
dangerous as high inflation.
27
Living with highly leveraged households
28
Reduce households’ downside risk
Access to insurance products
Health
Life
Accident
Disaster
Source: Dailynews
28
Living with highly leveraged households
29
Increase financial awareness
Technology can significantly simplify financial planning and budgeting
Source: CNET.com 29
Living with highly leveraged households
30
Manage the buffer
0
20
40
60
80
100
120
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Crisis
Household debt
US household debt and public debt % of GDP
Public debt
0
20
40
60
80
100
120
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Household debt
Thailand household debt and public debt % of GDP
Public debt
Fiscal space must be carefully managed as it is the ultimate shock absorber
Source: Federal Reserve Bank of St Louis, PDMO, Bank of Thailand, NESDB 30
Key Takeaways
31
- No. The debt has been rising primarily among lower-risk households
Does the rising debt increase short-term risk
to financial stability?
1
- Evidence shows the debt burden hinders consumption growth
- DSR>40% could hurt household’s consumption
To what extent, does the debt surge hurt
consumption?
2
- Poor households are likely to see disproportionate increase in DSR
- Impacts on consumption will not limited to poor households
How big is the threat associated with the potential rate hike?
3
32
End of document