Annex I. Methodology for the Analysis of Country Legal Systems
The spider charts (Figures 9–13) included in the paper are a graphical representation of a qualitative assessment conducted on the ASEAN-5 countries (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) and four large Asian countries (China, India, Japan, and Korea). The assessment of country systems is based on the analysis of legislation and on secondary sources.
The assessment focuses mostly on the existence of building blocks of systems for the prevention and treatment of over-indebtedness in the corporate and household sector. The degree to which the actual effectiveness of the systems is incorporated into the assessment is approximative, due to the lack of empirical information available. The numerical rating is generally based on a transposition of ROSC methodology ratings (i.e., non-compliant, 0–25; materially non-compliant, 26–50; largely compliant, 51–75; fully compliant, 76–100).
The specific methodological guidelines for the different blocks of the analysis are as follows:
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Cecchetti, Stephen, M. Mohanty, and Fabrizio Zampolli, 2011, “The Real Effects of Debt,” BIS Working Paper 352, September (Basel: Bank for International Settlements).
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Gebauer, Stefan, Ralph Setzer, and Andreas Westphal, 2017, “Corporate Debt and Investment: A Firm Level Analysis for Stressed Euro Area Countries,” ECB Working Paper Series 2101 (Frankfurt: European Central Bank).
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Lombardi, Marco, Madhusudan Mohanty, and Ilhyock Shim, 2017, “The Real Effects of Household Debt in the Short and Long Run,” BIS Working Paper 607, January (Basel: Bank for International Settlements).
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Mian, Atif, Amir Sufi, and Emil Verner, 2015, “Household Debt and Business Cycles Worldwide,” NBER Working Paper 21581 (Cambridge: National Bureau of Economic Research).
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Mian, Atif, Ludwig Straug, and Amir Sufi, 2019, “The Saving Glut of the Rich and the Rise of Household Debt” NBER Working Paper (Cambridge: National Bureau of Economic Research).
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This paper has benefitted from valuable feedback from Lamin Leigh, Kenneth H. Kang, Ken Kashiwase, Manrique Saenz, Rhoda Weeks-Brown, Sean Craig, and participants at IMF seminars and at the November 2019 IMF-Bank of Thailand high-level conference Emerging Markets in the New Normal: Dealing with Rising Domestic Leverage and the International Financial Cycles. To Nhu Dao and Agnes Ignawangsih provided excellent research assistance.
While this paper was written before the onset of the COVID-19 pandemic, its analytical thrust and policy conclusions were reinforced by it. The relevant sections of the paper have been updated to reflect for the implications of the pandemic shock.
The terms “debt overhang” and “over-indebtedness” are used interchangeably in this paper to refer to situations of excessive debt.
According to the June 2020 Global Financial Stability Update, aggregate assets of the Group of Ten (G10) central banks increased by US$6 trillion between mid-January and mid-June, more than double the increase seen during the two years of the global financial crisis from December 2007.
Indeed, there is a view that monetary policy may be too blunt an instrument to be able to target private debt. MPMs such as loan-to-value and debt-to-income limits have been shown to be effective in controlling credit conditions (see Jácome and Mitra, 2015). More recently, IMF (2020) shows that tighter macroprudential regulation to help EMEs dampen the effect of global financial shocks. The effect, however, exhibits diminishing marginal returns, suggesting that excessive macroprudential regulation may drive financial activities outside of the regulatory perimeter.
See Special Note on “Private Debt Resolution Measures in the Wake of the Pandemic”, May 2020.
The Asian Bond Markets Initiative (ABMI) was launched in December 2002 by ASEAN, China, Japan, and Korea— collectively known as ASEAN+3—to develop local currency bond markets and promote regional financial cooperation (ADB, 2017).
Using a panel of 30 countries over the past 40 years, Mian and Sufi (2017) show that a rise in the household debt to GDP ratio increases consumption in the near term but systematically predicts lower subsequent growth and a rise in unemployment. IMF 2017 finds that an increase in household debt has a positive contemporaneous relationship to GDP growth and consumption and a negative association in the future (three years ahead).
Following the methodology in Adrian et al. 2019, the estimated quartile regression coefficients are used to estimate the parameters of t-skew distribution:
We use this specification for two reasons. First, debt/GDP is a slow moving variable, and a change in debt may better capture short-term vulnerabilities. Second, we include household and corporate debt together in the same specification to be able to comment on the increase in one type of debt controlling for the other. However, household and corporate debt could likely be correlated. To address this, we include both the level and change for each type of debt’s principal components, as this would better capture independent dynamics. As an additional robustness check, we also use include household and corporate debt variables separately in individual specifications, with similar results. Data on debt to disposable income is limited.
Given the data intensive nature of the exercise, we are limited by the choice of sufficient instruments that could better capture endogeneity.
Individual economies are selected based on data availability.
An increase is defined as a one standard deviation increase in the household or corporate debt partition.
The outsize role of corporate debt at the tail reflect that the bottom percentile contains observations covering the Asian Financial Crisis.
For these countries, household debt levels are also close to or above high-risk thresholds identified by the literature (see Lombardi, Mohanty, and Shim 2017).
The macroeconomic response to the COVID-19 shock in terms of fiscal, monetary, and financial policy support is extensively covered in the April 2020 World Economic Outlook, Global Financial Stability Report and Fiscal Monitor, as well as the June 2020 World Economic Outlook Update, and is therefore not taken up in this section.
We use the terms “enterprises” as equivalent to “corporates” and the term “household” to refer to individuals or consumers. In the legal literature, the basic distinction is between enterprise or business insolvency and consumer insolvency; or between corporate insolvency and individual insolvency.
Some of the measures considered as preemptive in this paper (informal debt restructuring) could an also be utilized once over-indebtedness manifests itself but those measures may not be as effective to address it.
The analysis includes the ASEAN-5 countries (Indonesia, Malaysia, The Philippines, Singapore, and Thailand), and the four largest Asian economies (China, India, Japan and Korea).
Fintech companies constitute new players in many Asian economies, which also collect and use credit information (for instance, in China). A gap in coverage may be exist where these entities are currently not included in most credit information systems.
In addition to the institutional framework, the creation of asset management companies (AMCs) can increase the effectiveness of ex-post tools, due to the inherent specialization and concentration of creditor rights. However, the creation of AMCs can also have anticompetitive effects.