Household debt - is it driving credit growth?
/Following up on my posts on the banking system, I wanted to look a bit closer at household debts in Vietnam. It turns out that unlike OECD countries, the data around household debt is not great, so most of the specific data on household debt ends in 2016.
Source: World Bank Doing Business
Where to start? Well, first, let’s start with getting credit in Vietnam. Looking at data from the World Bank’s Doing Business project, depth of credit information has been good, but credit bureau’s are very new (started in 2015) and the coverage of the credit registry is still fairly limited (55% of the population in 2019).
But that hasn’t stopped a massive increase in household debt. It went from less than 10% in 2000 to more than 45% in 2016. That is more than a 35pp increase.
Source: The SEACEN Center for household debt, World Bank for domestic credit
Other ASEAN countries have much higher household debt figures. In 2016, Thailand was at 79% in 2016, Malaysia nearly 70% and Singapore nearly 60% (for 2017). And each of these have seen a 20pp increase over the past 8-10 years. So in this context, Vietnam is just in line with its peers.
Also, while the increase in Vietnamese household debt is big, it pales in comparison to the overall increase in domestic credit to GDP. Household debt is a part of the increase, and a big one, but the real driver of domestic credit growth doesn’t seem to be households. [One discrepency here ist hat the paper seems to have slightly different domestic credit figures than I do - not sure why that is. My figures for domestic credit come from the World Bank databank.
Two potentially key numbers to remember about household debt:
85% or thereabouts- This is the level of household debt to GDP when it starts to be a drag on GDP growth, consumption and employment.
65% - This is the approximate level where the correlation between household debt and financial crises increase.
Now, I said potentially key numbers, because this is definitely contested by economics. What we can say is that there is a correlation between high household debt and lower economic growth after a certain level (c85%). Why? Well, ultimately, unlike governments, households run out of room to borrow. When they have to retrench/delever, they spend less, lowering aggregate consumption figures and therefore economic growth. And if households have high debt during a recession, they may not be able to pay off loans, which can cause difficulties for banks.
Importantly, the relationship between HH debt to GDP depends on exchange rates, which is negative for Vietnam.
That is probably because there is little room for the government to maneuver when exchange rates are fixed. They may have to keep interest rates high, even during a recession. Also, they may not be able to take on a lot of debt (for example, in Japan, when it faced a debt crisis, the government was able to stimulate the economy through spending that resulted in the government ultimately taking over the corporate and consumer debt. The latter have much lower debt levels now, but government debt levels are extremely high).
Source: World Bank
Now back to Vietnam. Household debt is very sensitive to interest rate changes and favorable lending conditions. And Vietnam has been on a long tear of lower interest rates. There was a bump after the financial crisis, but since 2011, lending rates have fallen from 17% to 7.4% in 2018.
And looking a bit more at the household debt, these lower interest rates have resulted in much more mortgage/home loan debt. It is growing significantly faster than overall household debt. See chart below.
HPI = Housing price index. Source: SEACEN
So to summarize:
Lower interest rates plus greater access to credit have increased overall household debt.
Household debt has increased dramatically from below 10% of GDP to 47% in 2016.
It still makes up just a third of all domestic credit, by my calculations. So loans to households only partially caused the extremely large jump in domestic credit.
Households generally took out loans to purchase houses, and that drove HH credit growth.
While the growth in household debt is dramatic, it is still at a relatively low level (or at least it was in 2016) compared to levels where it might hurt growth.
And it is also low in comparison to its peers, like Thailand and Malaysia.
Right now we are seeing limited housing supply (I wrote about this a bit on October 4 - it’s driven by limited access to land), and limits on bank lending, so overall credit growth will likely slow. Household debt will not be immune.
But, credit growth isn’t in recession - it is still relatively solid at 7-8%.
This slowing credit growth would have been negative for growth, if all else was unchanged, but growing foreign investment is and will continue to push the economy. Plus an increase in productivity.
I hope that the State Bank of Vietnam starts to distribute more statistics, because it is really hard to find things that are normal in other economies. That would include the breakdown of credit lending, especially household debts. It shouldn’t be that hard. (But what do I know. I’ve never been a central banker!)