IMF highlights rising debt risks for Asian companies

Asia’s increased borrowing in recent decades has augmented the region’s exposure to rising interest rates and heightened market volatility, said the International Monetary Fund (IMF).

According to the IMF’s latest report on May 25, over 18 per cent of Vietnamese enterprises were found to have an interest coverage ratio (ICR) below one, indicating a high risk of default as of June 2022.

Additionally, 18.32 per cent of companies had an ICR between 1-4, making them vulnerable to increased borrowing costs, while 63.36 per cent had an ICR of four, signalling a good debt repayment capacity.

The report attributes the heightened risks to the rising cost of borrowing, as central banks tighten monetary policies and increase interest rates to combat inflation. Despite maintaining growth rates, companies face significant pressure due to higher borrowing costs, reducing their ability to repay debts.

As of mid-2022, 17 per cent of Asia’s corporate debt was held by firms with interest coverage ratios below 1, and another third in firms with interest coverage ratios between 1-4.

China, India, and Thailand had greater concentrations of corporate debt in firms with interest coverage ratios below one, a level signalling 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.

“Borrowing by the region’s governments, companies, consumers, and financial firms is well above levels prior to the global financial crisis. 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,” the IMF noted.

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

Cash buffers built up in recent years can provide a 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,” the IMF said.

The IMF also recommends that financial supervisory agencies remain vigilant amid increasing uncertainties, growing debt burdens, and rising debt-servicing costs. It also suggests adjusting macroprudential tools when necessary to address vulnerabilities within the corporate sector.

Central banks should separate monetary policy objectives from financial stability goals and utilise specialised instruments such as liquidity and lending facilities to safeguard financial stability while adjusting monetary policies to tackle inflationary pressures.

In Vietnam, the State Bank of Vietnam has implemented several measures since the beginning of the year to lower interest rates and facilitate credit expansion. The central bank has reduced interest rates three times this year.

Additionally, policies have been enacted to restructure repayment terms and maintain existing debt groups, providing support to customers facing difficulties.

The central bank also requires credit institutions to implement credit programmes and policies for specific sectors in accordance with government directives.

Vietnam, a rising economic powerhouse in Southeast Asia, is set to witness remarkable growth over the coming years.

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