Why Southeast Asia's Boom is a Bubble-Driven Illusion

Why Southeast Asia's Boom Is A Bubble-Driven Illusion

http://www.forbes.com/sites/jessecolombo/2014/01/23/why-southeast-asias-economy-is-a-giant-bubble-waiting-to-pop/4/[Tue, 09/09/2014 10:35:07 PM]

Connect|Sign up|Log in Help|AdChoices|Terms|Privacy

New Posts Most Popular Lists Video 2 Free Issues of Forbes

+1

America's Most Expensive Homes For Sale Right Now

Six Trends That Will Shape Consumer Behavior This Year

NextGen Innovators

INVESTING 1/23/2014 @ 6:46AM 93,558 views


Comment Now Follow Comments

Since the Global Financial Crisis, Southeast Asia has been one of the worlds few bright spots for economic growth and investment returns. With its relatively young population of 600 million and its growing middle class, Southeast Asia has been the scene of a modern-day gold rush as international companies clamor to get a piece of the action. Unfortunately, my research has found that much of this regions growth in recent years has been driven by ballooning credit and asset bubbles a pattern that is also occurring in numerous emerging economies across the globe.

In the past few months, I have published reports about the growing bubbles in Singapore, Malaysia, Thailand, the Philippines, and Indonesia, and I will use this report to explain the regions economic bubble as a whole. My five Southeast Asian country reports have generated quite a bit of interest and controversy, and were read nearly 1.3 million times, and were publicly denied by the central banks of Singapore, Malaysia, and the Philippines.

COVER STORY

Inside Herms

Jesse Colombo Contributor

I'm an economic analyst who is warning of dangerous post-2009 bubbles

Opinions expressed by Forbes Contributors are their own.

sShare Next Post

ConferencesForbes Reinventing America Summit

Forbes Womens Summit

Forbes 400 Philanthropy Summit

EducationForbes School of Business at Ashford University

ProductsForbes Identity Protection

Forbes Newsfeeds

Reprints & Permissions

BUSINESS INVESTING TECHNOLOGY ENTREPRENEURS OP/ED LEADERSHIP LIFESTYLE LISTS

CONFERENCES AND MORE



Ultra-low interest rates in the U.S., Europe, and Japan, combined with the U.S. Federal Reserves $3 trillion-and-counting quantitative easing programs caused a $4 trillion torrent of speculative hot money to flow into emerging market investments from 2009 to 2013. A global carry trade arose in which investors borrowed significant sums of capital at low interest rates from the U.S. and Japan for the purpose of purchasing higher-yielding emerging market investments and earning the difference. The surging foreign demand for emerging market investments created bubbles in those assets, especially in bonds. The emerging markets bond bubble resulted in record low borrowing costs for developing nations governments and corporations, and helped to inflate dangerous credit and property bubbles across the emerging world.

The flow of hot money into Southeast Asia after the financial crisis caused the regions currencies to rise strongly against the U.S. dollar, such as the Singapore dollars 22 percent increase, the Philippine peso and Malaysian ringgits 25 percent increase, the Thai baht and Vietnamese dongs 30 percent increase, and the Indonesians rupiahs 50 percent increase, which has been subsequently negated now that foreign capital has begun to flow out of Indonesias economy.

The post-Crisis bond bubble helped to reduce government bond yields in Singapore, Thailand, Indonesia, Malaysia, and the Philippines (click links for charts), while foreign institutional holdings of many Asian sovereign bonds increased dramatically:

Forbes Under 30 Summit

Forbes CIO Summit

Forbes CMO Summit

Forbes Healthcare Summit

Forbes and NAPFA Advisor iConference

Forbes Global CEO Conference

NewslettersForbes Investor

Special Situation Survey

Forbes Dividend Investor

Forbes Premium Income Report

Investing Newsletters

Company InfoAdvertise

Forbes Press Room

Forbes Careers

Contact Us

Sitemap

Help

Forbes China

Forbes India

Forbes Israel

Forbes Mexico

Forbes Middle East

Forbes Poland

Forbes Romania

Forbes Russia

Forbes Spain

RealClear

RealClear Politics

RealClear Markets

RealClear World

RealClear Sports

2 Free Issues Subscriber Services Gift Subscription

2014 Forbes.com LLC All Rights Reserved

Terms and Conditions Privacy Statement Market Data by Morningstar AdChoices



Foreign direct investment into several Southeast Asian countries - particularly Singapore, Malaysia, and Indonesia immediately surged to new highs after the Global Financial Crisis.

Heres the chart of Singapores FDI (net inflows, current dollars):

Malaysias FDI (net inflows, current dollars):



Indonesias FDI (net inflows, current dollars):

How Record Low Interest Rates Are Fueling The Bubble

The emerging markets bond bubble helped to push EM corporate and government borrowing costs to all-time lows, but there is another factor that is causing the inflation of bubbles in Southeast Asia: record low bank loan rates. Large corporations have a choice to borrow from either the bond market or directly from banks, and typically choose the option that provides the lowest borrowing costs.

Western benchmark interest rates particularly the LIBOR or London Interbank Offered Rate are used to price bank loans in numerous countries throughout the entire world, and most have been hovering just above zero percent in the five years since the Global Financial Crisis. Most Western economies were hit extremely hard in the financial crisis and have faced a constant threat of falling into a deflationary trap since then, which is why their benchmark interest rates have been at virtually zero. In the U.S. Federal



Reserves case, it has been running what is known as ZIRP or zero-interest rate policy.

Here is the chart of the LIBOR interest rate:

Due to the fact that the West was the primary epicenter of the 2003 to 2007 bubble economy and ensuing Global Financial Crisis, emerging market economies were able to rebound more quickly and continue growing at a much greater rate. While many Southeast Asian economies have been growing at a 5 percent or greater annual rate since 2008, they have been able to borrow at record low Western interest rates such as those based on the LIBOR. LIBOR is used as the base rate for nearly two-thirds of all large-scale corporate borrowings in Asia. Western interest rates are too low relative to Southeast Asias economic growth and inflation rates, so a large-scale borrowing binge has been occurring as a side-effect. Southeast Asias credit bubble may balloon even larger because Western benchmark interest rates are likely to stay at very low levels for several more years.

Local benchmark interest rates in many Southeast Asian countries have hit record lows since 2008 as well. Local interest rates are used for approximately one-third of large-scale corporate loans in Asia, as well as most consumer, mortgage, and smaller business loans. Southeast Asian central banks have kept their benchmark interest rates low to stem export-harming currency appreciation that has resulted from capital inflows since the financial crisis.

The chart below is Singapores benchmark interest rate, or SIBOR, which is commonly used as a reference rate for loans throughout Southeast Asia:



Here is Malaysias bank lending rate chart:

The Philippines bank lending rate:

Indonesias benchmark interest rate:



Thailands benchmark interest rate:

Southeast Asias Boom Is Driven By A Credit Bubble

Abnormally cheap credit conditions have led to the inflation of credit bubbles across Southeast Asia, which have been a significant driver of the regions economic growth in recent years.

Singapores total outstanding private sector loans have soared by 133 percent since 2010:

Malaysias private sector loans have increased by over 80 percent since 2008:



The Philippines M3 money supply, a broad measure of total money and credit in the economy, has more than doubled since 2008, and sharply accelerated in 2013 as interest rates hit new lows:

Indonesias private sector loans have risen by nearly 50 percent in the past two years:

Thailands private sector loans have risen by over 50 percent since the start of 2010:



Though dangerous credit bubbles are inflating across Southeast Asia, some countries credit bubbles are driven primarily by consumer or household debt, while others are driven mainly by commercial sector borrowing, particularly for construction and property development. Singapore, Malaysia, and Thailands credit bubbles have a significant household debt component as the chart below shows:

Denise Law, FT

Singapores household debt-to-GDP ratio recently hit nearly 75 percent, which is up from 55 percent in 2010 and 45 percent in 2005. Though Singapores total outstanding household debt has increased by 41 percent since 2010, the city-states household income and wages have increased by a mere 25 percent and 15 percent respectively.

Malaysia now has Southeast Asias highest household debt load after its household debt-to-GDP ratio hit a record 83 percent, which is up from 70 percent in 2009, and up from just 39 percent at the start of the Asian Financial Crisis in 1997. Malaysian household debt has grown by approximately 12 percent annually each year since 2008.

Thailands household debt-to-GDP ratio also hit a recent record of 77 percent, which is up from 55 percent in 2008, and just 45 percent a decade ago. Total lending to Thai households increased at a 17 percent annual rate from 2010 to 2012, while household credit provided by credit card, leasing and personal loan companies rose at an alarming 27 percent annual rate.



Property Bubbles Are Ballooning Across Southeast Asia

Ultra-low interest rates in Southeast Asia have helped to inflate property bubbles throughout the region, which has also contributed to the staggering rise in household debt.

Singapores mortgage rates are based upon the SIBOR rate discussed earlier, which has been held at under one percent for over five years. Singapores property prices have roughly doubled since 2004, and are up by 60 percent since 2009 alone:

Source: GlobalPropertyGuide.com

The average price of a new 1,000-square-foot condo has risen to $1 million to $1.2 million Singapore dollars ($799,000 to $965,638 U.S.), making the city-state the worlds third most expensive residential property market behind Canada and Hong Kong. A 2013 study by The Economist magazine showed that Singapores residential property prices are 57 percent overvalued based on its historic price-to-rent ratio. Singapore now ranks as one of the worlds ten most expensive cities to live.

Economic bubbles and the resulting false prosperity in other Asian countries have spilled over into Singapore as investors from across the region clamor to buy properties there. In 2013, 34 percent of foreign property-buyers in Singapore were from China, 32 percent were from Indonesia, and 13 percent were from Malaysia.

Total outstanding mortgages increased by 18 percent each year over the last three years, bringing total mortgage loans to 46 percent of Singapores GDP from 35 percent. Almost a third of Singapores mortgages are utilized for speculative property purchases rather than owner occupation. Singapores mortgage loan bubble is one of the primary reasons why the countrys household debt has been increasing at such a high rate in recent years.

Malaysian property prices have been increasing parabolically in recent years, as the chart below shows. Mortgage loans account for nearly half of all Malaysias household debt, and its rapid increase is the primary driver of the



countrys household debt bubble.

Prices have nearly doubled in the past decade in certain Philippine property markets, such as the Makati Central Business District (CBD):

In the first six months of 2013, the average price of a 3-bedroom luxury condominium in Makati CBD rose by a frothy 12.92 percent (9.98 percent inflation-adjusted), after rising 5.6 percent in Q1 2013, 8 percent in Q4 and 8.3 percent in Q3 2012. The average price of a premium 3-bedroom condominium in Bonifacio Global City surged by 12.4 percent y-o-y, while secondary residential property prices in Rockwell Center rose by 10.6 percent y-o-y. Philippine outstanding mortgage loans are rising at an even faster rate than consumer credit, such as a 42 percent increase in 2012. The Philippines construction sector is expected to expand by double digits in 2014 and account for nearly half of economic growth thanks in large part to the countrys property development boom.

Though Indonesian property market data is spotty and difficult to source for all markets, Jakarta and Bali property prices are becoming frothy, especially at the higher end of the market. Jakarta condominium prices rose between 11 and 17 percent on average between the first half of 2012 and 2013, after rising by more than 50 percent since late 2008. Luxury real estate prices in Jakarta soared by 38 percent in 2012, while luxury properties in Bali rose by 20 percent the strongest price increases of all global luxury housing markets. A



small two-room apartment on the outskirts of Jakarta can cost nearly $80,000 USD (RM253,373), making housing unaffordable for many ordinary Indonesians. From June 2012 to May 2013, outstanding loans for apartment purchases nearly doubled from IDR 6.56 trillion (USD $659.3 million) to IDR 11.42 trillion (USD $1.15 billion).

Thailands property bubble is centered primarily in the condo market, which is the most common type of dwelling for Bangkok residents, and is the speculative vehicle of choice for foreign investors who typically hail from Singapore and Hong Kong. According to Bank of Thailand, condo prices soared by 9.39 percent, while townhouses prices rose by 6.86 percent in Q1 2013, after rising by similar amounts for the past several years. The majority of new mortgages originated are concentrated at the lower end of the Thai housing market, and Bank of Thailand warned that low interest rate home loans could cause a property bubble.

Boonchai Bencharongkul, a wealthy Thai industrialist, said I think the current situation is worrisome. As one of those who had such an experience, I can smell it now. People are rushing and competing to buy condos while more and more people are driving Ferraris. These are the same things we saw before the 1997 crisis occurred.

Construction Bubbles Abound Across Southeast Asia

Low interest rates and soaring property prices create the perfect conditions for construction bubbles, which is what occurred in Ireland, Spain, the United States, and other countries from 2003 to 2007, and what has been occurring throughout Southeast Asia in recent years. Construction is a capital-intensive economic activity that benefits from cheap and easy credit, which is certainly the case in Southeast Asia. Southeast Asias construction boom has been focused on condominium and residential property development, hotels, resorts, casinos, malls, airports, infrastructure projects, and skyscrapers.

Construction has been the most significant contributor to Singapores economic growth since 2008, as the chart below shows:



Construction industry work permits rose to 306,500 in June 2013 from 180,000 at the end-2007, which was the peak of Singapores economic boom before the financial crisis hit. Singapores construction boom has been driving an over 18 percent annual increase in total outstanding building and construction loans in recent years. Bank loans for building and construction, and mortgages recently rose to 79 percent of Singapores GDP, which is up from 62 percent in 2010.

Casino and resort construction has become a strong driver of building activity ever since gambling became legal in Singapore in 2010. The Marina Bay Sands and Resorts World Sentosa opened in 2010 at a cost of over $10 billion. Singapore has also been aggressively upgrading and expanding its Changi International Airport, which has been a driver of construction activity. There is so much construction activity in Singapore that the country has 306,500 construction workers (compared to its 5.3 million population) from other Asian countries living there on work permits.

After growing by over 20 percent in 2012, Malaysias construction spending was expected to rise by 13 percent in 2013. Malaysias plan to build the tallest building in Southeast Asia, the 118-story Warisan Merdeka Tower, are a major red flag according to the Skyscraper Index, which posits that ambitious skyscraper projects are a common hallmark of economic bubbles.

In the Philippines, casinos, condominiums, and shopping malls have been driving construction activity. The Philippines now hosts 9 of the worlds 38 largest malls beating even the U.S., China, and most other developed countries. The Philippines construction sector is expected to expand by double digits in 2014, and account for nearly half of the countrys economic growth.

Indonesia has been experiencing a construction boom in every sector, including hotels, condominiums, infrastructure, airports, and government buildings. At least 61 new hotels are confirmed to open in Jakarta by 2015. Indonesian construction contracts were estimated at more than $40 billion in



2013, up from $32.4 billion in 2012.

Thailands construction boom has been centered upon condominium development and infrastructure projects, which are funded by the governments deficit spending. Construction spending is expected to grow by nearly 7 percent annually for the next five years.

Governments Are Borrowing To Create Economic Growth

The governments of Thailand and Malaysia have been taking advantage of low borrowing costs courtesy of the emerging markets bond bubble to finance deficit spending for the purpose of boosting economic growth.

Since 2010, Malaysias public debt-to-GDP ratio has been at all time highs of over 50 percent due to large fiscal deficits that were incurred when an aggressive stimulus package was launched to boost the countrys economy during the Global Financial Crisis. Malaysia now has the second highest public debt-to-GDP ratio among 13 emerging Asian countries according to a Bloomberg study. Malaysias high public debt burden led to a sovereign credit rating outlook downgrade by Fitch in July.

Malaysias government has been running a budget deficit since 1999:

Thailands government spending ramped up significantly in 2012 after the launch of a $2.5 billion first car tax rebate program that was fraught with problems as well as an unsuccessful rice subsidy scheme that lost the



government 136 billion baht or $4.4 billion even though it was promoted as cost-neutral. Thailands government also plans to spend 2 trillion baht ($64 billion) nearly one-fifth of the countrys GDP by 2020 on growth-driving infrastructure projects, including a network of high-speed railway lines to connect the countrys four main regions with Bangkok. The interest alone on this new debt will cost another 3 trillion baht over the next five decades.

Thailands government spending is up by nearly 40 percent since 2008:

The countrys government has been running a budget deficit since 2008 to support its spending:

A wealthy Thai industrialist, Boonchai Bencharongkul, warned against excessive government spending, saying This time, the nature of the crisis might be different. Last time it was the private sector that went bankrupt, but this time we might see the government collapse. Sawasdi Horrungruang, founder of NTS Steel Group, cautioned that Thailands government should not borrow beyond its ability to service its debt, which will eventually become the burden of taxpayers.

How Singapores Financial Sector Is Driving The Bubble

Singapore has grown to become Southeast Asias banking and financial center, and the regions rise and inflating economic bubble in recent years has helped the city-state to earn the nickname The Switzerland of Asia.



Singapores financial sector is now six times larger than its economy, with local and foreign banks holding assets worth S$2.1 trillion (US$1.7 trillion). The Singaporean financial sectors assets under management (AUM) have increased at a 9 percent annual rate from 2007 to 2012, but surged 22 percent in 2012. The primary reason for the countrys rapid AUM growth is its growing role as a banking hub in Southeast Asia, and it has been riding the coattails of the regions economic bubble. A full 70 percent of assets managed in Singapore were invested in Asia in 2013, which is up from 60 percent in 2012. Singapores financial services industry grew 163% between 2008 and 2012.

Singapores banks have been contributing to the inflation of Southeast Asias economic bubble due to their use of the abnormally-low SIBOR as a reference rate for loans made throughout the region.

Here is the chart of the SIBOR interest rate as a reminder of how low it has been for the past half-decade:

To learn more about Singapores financial sector and its role in inflating Southeast Asias economic bubble, please read this section of my detailed report about Singapores bubble economy.

How China Is Driving Southeast Asias Bubble

Economic bubbles are not confined to Southeast Asia, unfortunately; since 2008, Chinas economy has devolved into a massive economic bubble that has been contributing to Southeast Asias bubble.

Here are a few statistics that show how large Chinas bubble has become:

Chinas total domestic credit more than doubled to $23 trillion from $9 trillion in 2008, which is equivalent to adding the entire U.S. commercial banking sector.

Borrowing has risen as a share of Chinas national income to more than 200 percent, from 135 percent in 2008.

Chinas credit growth rate is now faster than Japans before its 1990 bust and Americas before 2008, with half of that growth in the shadow-banking sector.

As mentioned at the beginning of this report, Chinas government has encouraged the construction of countless cities and infrastructure projects to generate economic growth. Many of Chinas cities, malls, and other buildings



are still completely empty and unused even years after their completion, as these eerie, must-see satellite images show.

China has a classic property bubble that has resulted in soaring property prices in the past several years. A recent report showed that property prices increased 20 percent in Guangzhou and Shenzhen from a year earlier, and jumped 18 percent in Shanghai and 16 percent in Beijing.

Chinas inflating economic bubble has generated an incredible amount wealth (albeit much of it temporary), a portion of which has flowed into Southeast Asia. Wealthy Chinese have been buying condominiums in desirable locations across Southeast Asia, and its notoriously free-spending gamblers are the primary reason for the casino building boom in numerous Southeast Asian countries, particularly in Singapore and the Philippines. Chinese companies have been investing and lending heavily in Southeast Asia, with a strong focus on the natural resources sector.

From 2002 to 2012, Chinas bilateral trade with Southeast Asia increased 23.6 percent annually, and China is now Southeast Asias largest trade partner, while Southeast Asia is Chinas third-largest trade partner.

Though several lengthy books can be written about Chinas rise, economic bubble, and how it affects Southeast Asia, my goal is to succinctly show how dangerous Chinas economic bubble has become and emphasize the fact that Southeast Asias economy has been benefiting from Chinas false prosperity. The eventual popping of Chinas bubble will send a devastating shockwave throughout Southeast Asias economy, which will contribute to the ending of the regions bubble economy.

The Role Of Southeast Asias Frontier Economies

This report has focused primarily on the larger, more developed Southeast Asian countries because they have a far greater influence on the regions economy compared to the frontier economies of Vietnam, Cambodia, Laos, and Burma (Myanmar). The five largest Southeast Asian economies also have more advanced financial markets that are better integrated with global financial markets, and thus pose a greater systemic financial risk than the regions frontier economies.

Southeast Asias frontier economies have been growing rapidly in recent years for many of the same reasons as their more developed neighbors, including:

Rising trade with China

Rising Chinese investment

Increasing intraregional trade

Loose global monetary conditions and hot money

Higher commodities prices

Credit and property bubbles

Vietnam experienced a property and credit bubble that popped several years



ago and saddled the countrys banking system with bad loans. International realty firm CB Richard Ellis warned last year that Phnom Penh, Cambodia was experiencing a property bubble. Some local observers have suspected that property prices in Vientiane, Laos were in a bubble. Property prices in Yangon, Burma have exploded higher in recent years making commercial rents more expensive than in Manhattan.

While relevant data is few and far between, it is not unreasonable to believe that Southeast Asias frontier economies are experiencing froth or bubbles of their own for the same reasons as larger economies in the region. Vietnam, Cambodia, Laos, and Burma are dangerously exposed to the eventual popping of Chinas economic bubble as well as the popping of Southeast Asias overall bubble.

Cracks Are Beginning To Show

Southeast Asias financial markets were strong performers in late-2012 and early-2013 until news of the U.S. Federal Reserves QE taper plans surfaced in the Spring of 2013, causing many of these markets to fall sharply due to fears of reduced stimulus. This rout did not come as a surprise to me as I had been warning that hot money flows were inflating asset bubbles in emerging market countries, and I even published a report titled All The Money Were Pouring Into Emerging Markets Has Created A Massive Bubble just a few months before these markets plunged. The sensitivity of emerging market asset prices and currencies to the U.S. Federal Reserves stimulus programs was an additional confirmation that the emerging markets bubble owed its existence largely to hot money flows. The ultimate ending of the Feds current QE3 program which many economists expect this year is likely to put further pressure on emerging markets and contribute to the popping of their bubbles.

While most of Southeast Asias financial markets and currencies have been treading water since last Springs taper panic, Indonesias situation has continued to deteriorate, causing the rupiah currency to significantly weaken due to capital outflows. The rupiah is down by nearly 50 percent from its 2011 peak. Indonesia was hit harder by the taper panic than other Southeast Asian countries because of its worsening trade and current account deficits.

Thailand has been embroiled in political turmoil in recent months as opposition protestors have been demanding the resignation of Prime Minister Yingluck Shinawatra. Opposition members claim that Yingluck is carrying on the same corrupt practices as her billionaire brother, former Prime Minister Thaksin Shinawatra, who was ousted in a military coup in 2006. The protests have harmed Thailands tourism industry, which is expected to slow 2014 economic growth to half of what it would have been without the demonstrations. Thailands stock market has fallen sharply in recent months as a result of the political strife.

How Southeast Asias Bubble Will Pop

Southeast Asias economic bubble will most likely pop when the bubbles in



China and emerging markets pop and as global and local interest rates eventually rise, which are what inflated the regions credit and asset bubbles in the first place. Southeast Asias bubble economy may continue to inflate for several more years if the U.S. Fed Funds Rate, LIBOR, and SIBOR continue to be held at such low levels.

I expect the ultimate popping of the emerging markets bubble to cause another crisis that is similar (though not identical in every technical sense) to the 1997 Asian Financial Crisis, and there is a strong chance that it will be even worse this time due to the fact that more countries are involved (Latin America, China, and Africa), and because the global economy is in a much weaker state now than it was during the booming late-1990s.

I recommend taking the time to read my detailed reports on Singapore, Malaysia, Thailand, the Philippines, and Indonesia to get a better understanding of Southeast Asias economic bubble.

In the coming months, I will be publishing more reports about bubbles that are developing around the entire world most of which you probably never knew existed. Please follow me on Twitter, Google+ and like my Facebook page to keep up with the latest economic bubble news and my related commentary.

See Also:Lookup Property Values

100% Construction Loans

Business Construction Loan

US Economy Predictions

Economic Forecasts

Online Budget Planner

Economic Magazines

Income Tax Tables

Print Report Corrections Reprints & Permissions

PROMOTED STORIES Ads by Gravity

MAJOR GAFFE: Top Secret Apple Product Revealed

Forget the upcoming iPhone 6, this new Apple gizmo is truly

The Unexpected Love Letter He Won't Soon Forget

Without your paycheck, how long would you be able to

The Death of Cable Leaked: Apple's next The Insider Story On Exposed: 100+ Apple

6 comments, 3 called-out Comment Now Follow Comments



smart device (shocking)

Apples Shocking New Device

Scientists Couldnt Keep This Secret

forbes.comWhy Southeast Asia's Boom Is A Bubble-Driven Illusion

JsZS13YWl0aW5nLXRvLXBvcC80LwA=: form1: q: Search companies, people and listsinput3:

Documents

Why Southeast Asia's Boom is a Bubble-Driven Illusion