Sectoral Debt Capacity and Business Cycles: Developing Asia and the World Economy

SECTORALDEBTCAPACITYANDBUSINESSCYCLES DEVELOPINGASIAANDTHEWORLDECONOMY BadaHan,RashadAhmed,YothinJinjarak,andJoshuaAizenman NO.681 May2023 ADBECONOMICSWORKINGPAPERSERIES ASIANDEVELOPMENTBANK ADBEconomicsWorkingPaperSeries SectoralDebtCapacityandBusinessCycles:DevelopingAsiaandtheWorldEconomy BadaHan,RashadAhmed,YothinJinjarak,andJoshuaAizenman TheADBEconomicsWorkingPaperSeriespresentsresearchinprogresstoelicitcommentsandencouragedebateondevelopmentissuesinAsiaandthePacific.TheviewsexpressedarethoseoftheauthorsanddonotnecessarilyreflecttheviewsandpoliciesofADBoritsBoardofGovernorsorthegovernmentstheyrepresent. No.681|May2023 BadaHan(badahan@bok.or.kr)isaneconomistattheEconomicResearchInstitute,BankofKorea.RashadAhmed(rashad.ahmed@occ.treas.gov)isafinancialeconomistattheOfficeoftheComptrolleroftheCurrency,USDepartmentoftheTreasury,andYothinJinjarak(yjinjarak@adb.org)isasenioreconomistattheEconomicResearchandRegionalCooperationDepartment,AsianDevelopmentBank.JoshuaAizenman(aizenman@usc.edu)isaprofessorofinternationalrelationsandeconomicsattheUniversityofSouthernCalifornia. ASIANDEVELOPMENTBANK CreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO) ©2023AsianDevelopmentBank 6ADBAvenue,MandaluyongCity,1550MetroManila,PhilippinesTel+63286324444;Fax+63286362444 www.adb.org Somerightsreserved.Publishedin2023. ISSN2313-6537(print),2313-6545(electronic)PublicationStockNo.WPS230151-2 DOI:http://dx.doi.org/10.22617/WPS230151-2 TheviewsexpressedinthispublicationarethoseoftheauthorsanddonotnecessarilyreflecttheviewsandpoliciesoftheAsianDevelopmentBank(ADB)oritsBoardofGovernorsorthegovernmentstheyrepresent. ADBdoesnotguaranteetheaccuracyofthedataincludedinthispublicationandacceptsnoresponsibilityforanyconsequenceoftheiruse.ThementionofspecificcompaniesorproductsofmanufacturersdoesnotimplythattheyareendorsedorrecommendedbyADBinpreferencetoothersofasimilarnaturethatarenotmentioned. Bymakinganydesignationoforreferencetoaparticularterritoryorgeographicarea,orbyusingtheterm“country”inthispublication,ADBdoesnotintendtomakeanyjudgmentsastothelegalorotherstatusofanyterritoryorarea. ThisworkisavailableundertheCreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO)https://creativecommons.org/licenses/by/3.0/igo/.Byusingthecontentofthispublication,youagreetobeboundbythetermsofthislicense.Forattribution,translations,adaptations,andpermissions,pleasereadtheprovisionsandtermsofuseathttps://www.adb.org/terms-use#openaccess. ThisCClicensedoesnotapplytonon-ADBcopyrightmaterialsinthispublication.Ifthematerialisattributedtoanothersource,pleasecontactthecopyrightownerorpublisherofthatsourceforpermissiontoreproduceit.ADBcannotbeheldliableforanyclaimsthatariseasaresultofyouruseofthematerial. Pleasecontactpubsmarketing@adb.orgifyouhavequestionsorcommentswithrespecttocontent,orifyouwishtoobtaincopyrightpermissionforyourintendedusethatdoesnotfallwithintheseterms,orforpermissiontousetheADBlogo. CorrigendatoADBpublicationsmaybefoundathttp://www.adb.org/publications/corrigenda.Notes: Inthispublication,“$”referstoUnitedStatesdollars. ADBrecognizes“Korea”astheRepublicofKoreaand“US”astheUnitedStates. TheADBEconomicsWorkingPaperSeriespresentsdata,information,and/orfindingsfromongoingresearchandstudiestoencourageexchangeofideasandtoelicitcommentandfeedbackaboutdevelopmentissuesinAsiaandthePacific.Sincepapersinthisseriesareintendedforquickandeasydissemination,thecontentmayormaynotbefullyeditedandmaylaterbemodifiedforfinalpublication. ABSTRACT Thispaperreviewsthepatternsofsectoraldebtsandgrowthandthemechanismsexplainingtheadverseeffectsofdebtburdensongrowthrates.Theempiricalanalysiscoversasampleof55emergingandfrontiermarketeconomies.Futureeconomicgrowthismoresensitivetorisinghouseholddebtthancorporatedebt.However,theseeffectsarehighlyheterogenousacrosseconomiesanddependonrelativeincome.Forthedevelopingeconomieswithagrossdomesticproductpercapitain2010below$10,000(purchasingpowerparity-adjustedin2017internationaldollar),thecoefficientsofalltypesofsectoraldebtsarenegativeandsignificantatleastatthe5%level.Fordevelopingeconomiesathigherincomelevels,householddebtsmattermorethanothersectoraldebtsforsubsequenteconomicgrowth. Keywords:householddebts,corporatedebts,publicdebts,financialstability,creditcycles JELcodes:E44,F34,G51,H63 TheviewsexpressedhereinarethoseoftheauthorsanddonotnecessarilyreflectthoseoftheAsianDevelopmentBank,theBankofKorea,theUniversityofSouthernCalifornia,andtheUSDepartmentoftheTreasury. 1.Introduction Understandingthereal-timedynamicsofdebtcapacityisaduediligencerequiredforpolicymakersindevelopingAsia.Thepolicychallengeappliestototaldebtandtosectoraldebts,i.e.,disaggregateddebtsofthehousehold,nonfinancialcorporate,public,andfinancialsectors.FordevelopingAsia,debtlevelsincreasedthroughthepandemicashouseholdshadlimitedaccesstosocialsafetynets,firmsencounteredilliquidity,andauthoritiesrampeduppandemic-relatedspending.Debtbuilduphasbeenbroad-basedacrosssectors.Borrowingsbynonfinancialcorporationsandgovernmentsaccountedformorethanhalfoftheincre