## Annex I. Methodology for the Analysis of Country Legal Systems (wpiea2020172-print-pdf)

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### Introduction and Context
- Post-global financial crisis (GFC) environment:
  - Overall global debt stood at US$257 trillion, or 320 percent of global GDP as of end-2019.
  - Private debt (corporate and household) comprise three-fourths of global debt.
  - Asia accounts for nearly a third of global private debt, equivalent to approximately 250 percent of regional GDP.
- COVID-19 amplification of pre-existing risks:
  - Emerging Asia is expected to contract by 0.8 percent in 2020 (June 2020 World Economic Outlook Update).
  - Aggregate assets of the G10 central banks increased by US$6 trillion between mid-January and mid-June 2020, more than double the increase seen during the two years of the global financial crisis from December 2007 (June 2020 Global Financial Stability Update).
- Stylized facts on private debt in Asia:
  - Rapid rise in household debt after the GFC in several Asian economies (China, Korea, Thailand); household debt remains elevated in Korea and Thailand.
  - Corporate debt accelerated since 2008 in several countries, growing rapidly in China, Korea, and Singapore.
  - Housing-related debt drove household debt increases in Korea, Singapore, China, and Australia; in Thailand consumer loans and the cooperative sector were key drivers.
  - In many Asian economies, debt increases have outpaced disposable income; debt as a share of disposable income is a closer measure of debt-servicing capacity than debt as a share of GDP.

### Macroeconomic Costs of Over-Indebtedness
- General literature findings:
  - Leverage supports intermediation, consumption, investment, and growth at moderate levels; at high levels it reduces investment, distorts allocation, and curtails growth.
  - Over-indebted households reduce consumption as perceived permanent income and wealth fall.
- Threshold and nonlinear effects (literature estimates preserved as stated):
  - Cecchetti et al. (2011) estimate tipping points at 85 percent of GDP for households and 90 percent for corporates.
  - IMF (2017): increase in household debt has a positive contemporaneous relationship to GDP growth and consumption but a negative association three years ahead.
  - Threshold estimates cited:
    - Household debt-to-GDP threshold between 36 percent and 70 percent for positive long-term growth effects.
    - Negative long-run effects on consumption intensify as household debt-to-GDP exceeds 60 percent, and for GDP growth as it exceeds 80 percent (Lombardi et al., 2017).
  - Recent work explores time- and state-dependent thresholds (Yang and Su, 2018).

### Methodological Approach: Growth-at-Risk (GaR) Application
- Rationale:
  - To capture nonlinearities and tail risks, the paper applies the Growth at Risk (GaR) framework (Adrian, Boyarchenko, and Giannone, 2019) to several Asian economies.
  - GaR links current macrofinancial conditions to quantiles of future output growth, providing insight into the entire growth distribution rather than a point estimate.
- Implementation details:
  - Quartile regressions of GDP growth are estimated on macrofinancial variable groups partitioned via principal components (up to the first three principal components) to reduce dimensionality.
  - The quartile regression estimates are used to parametrically fit a t-skew (skewed t) conditional distribution of GDP growth.
  - Regression specification (as provided):
    - y_{t+q} = β_y^q y_t + β_f^q fin_t + β_tp^q tp_t + β_l^q lvg_t + ε_{t+q}^q
    - Regressor groups: output growth in period t; financial conditions; trade partner macroeconomic conditions; private leverage (household and corporate).
  - Financial conditions include: credit growth, sovereign and corporate bond spreads, REER change and volatility, terms of trade, VIX, equity and house price growth.
  - Trade partner indicators comprise US and China GDP growth.
  - Private leverage comprises household and corporate debt to GDP ratios (level and change).
  - Data frequency and sample: quarterly data from 1995:Q1 to 2018:Q4, with one period lags to address potential endogeneity.
  - From estimated quantile coefficients, the parameters {μ_t, σ_t, α_t, ν_t} of the skewed t-distribution f are chosen to minimize squared distance between estimated quantiles (10, 25, 75, 90 percent) and the skewed t quantile function, following Adrian et al. 2019.

### GaR Estimated Distributions and Key Empirical Findings
- Coverage:
  - Conditional distributions estimated individually for Japan, Korea, Singapore, and Thailand.
- Tail risk metric:
  - The left tail of the growth distribution is measured by GAR5% (the level of growth below which 5 percent of the growth distribution lies).
- Baseline distributional patterns:
  - Risks are tilted to the downside over the medium term: in most cases both the mode and GAR5% decline over the medium term.
  - Baseline conditional GDP distributions are asymmetric with a fat left tail, highlighting nonlinear impacts of macrofinancial conditions (including leverage) on growth.
  - Estimated coefficients for household and corporate debt differ over the distribution, often larger at the left tail than at the mean and upper tail.
- Time horizons:
  - Near term is defined as 4 quarters ahead; medium term is defined as 12 or 16 quarters ahead.

### Impact of One-Standard-Deviation Shocks to Private Debt
- Shock definition:
  - An increase is defined as a one standard deviation increase in the household or corporate debt partition.
- Time-dimension findings:
  - In some cases both household and corporate debt appear to support growth in the short run; the mode can shift to the right in the short run.
  - The boost to growth from household debt is more short-lived than that from corporate debt.
- Distributional-dimension findings:
  - Household debt drag on growth tends to persist throughout the distribution.
  - Corporate debt drag tends to be concentrated at the lower end of the distribution; a one standard deviation shock to the corporate debt/GDP ratio shifts the distribution left but by less over the medium term, with a smaller decline in the mode; the left tail thickens but by a smaller degree.
- Explanatory factors:
  - Preexisting levels and composition of debt matter: household debt levels are higher than corporate debt levels in many sample countries.
  - Household debt has tended to fuel consumption rather than productive investment.
  - Institutional differences: advanced corporate debt markets and insolvency frameworks provide more avenues to manage corporate leverage; options for managing household debt (particularly at lower income levels) are more limited.
- Caveat:
  - The outsize role of corporate debt at the tail reflects that the bottom percentile contains observations covering the Asian Financial Crisis.

### Policy Implications from GaR and Complementary Analysis
- General guidance:
  - High private leverage can pose medium-term risks to growth; policies should both prevent over-indebtedness and manage existing debt stocks.
  - Sequential approaches that “flatten the curve” of insolvencies can preserve judicial capacity and economic value.
- Multipronged policy framework:
  - Macroeconomic policies that support growth enhance capacity to repay.
  - Institutional frameworks and supervisory strength allow safe operation with higher household debt.
  - Macroprudential measures (e.g., loan-to-value, debt-to-income limits) are first-line defenses in normal times but have diminishing marginal returns if excessively tightened.
  - Monetary policy is too blunt to target private debt directly.
  - Fiscal policy should remove tax distortions favoring debt over equity (“debt bias”):
    - For corporates: bias induced through deductibility of interest but not equity costs.
    - For households: bias induced from mortgage interest deductions.
    - Policy options: gradual reform of tax deductions for mortgage interest; limiting interest deductibility for corporates combined with an “allowance for corporate equity” system to mitigate revenue loss.
  - Legal tools can be potent where macroeconomic policy space is constrained and complement measures addressing credit growth outside the regulatory perimeter.

### Legal Frameworks: Ex-Ante (Preventive) and Ex-Post (Remedial) Measures
- Roles:
  - Legal frameworks enforce contractual rights, regulate creditor competition, preserve viable enterprises, and offer second chances to honest debtors.
  - Effective strategy involves both ex-ante measures (avoid costly formal judicial insolvency) and ex-post measures (address over-indebtedness when materialized).
- Ex-Ante tools for enterprises:
  - Credit and financial information (credit registries/bureaus, audited financial statements).
  - Early warning systems.
  - Informal debt restructuring mechanisms.
  - Observed gaps: limited enterprise coverage in credit information systems; early warning systems limited or focused on large firms; main information source often banking sector, limiting coverage of non-bank liabilities.
- Ex-Ante tools for households:
  - Credit information systems, advice to debtors, informal debt restructuring (ADR, mediation, conciliation, arbitration), codes of conduct, reasonable forbearance.
  - Credit information systems in some Asian countries have wide coverage of the adult population, but ASEAN coverage is diverse; Fintechs collect credit information that may not be included in official systems.
  - Support to debtors via public institutions, pro bono programs, or specialist advice is important.
- Ex-Post tools for corporates:
  - Reorganization procedures, liquidation proceedings, debt enforcement.
  - Reorganization introduced in most Asian countries, but practice and effectiveness vary (reorganizations infrequent in China; India mandates an attempt; Korea and Japan closer to international standard).
  - Liquidation often destroys value due to undeveloped markets for distressed assets and lack of qualified insolvency professionals.
  - Debt enforcement effectiveness varies; some jurisdictions allow out-of-court enforcement of secured claims (India, Malaysia, Singapore).
  - Specialized insolvency courts exist in some countries (Thailand, Korea, China, India); development of the insolvency profession is ongoing.
- Ex-Post tools for households:
  - Personal insolvency aims at rehabilitating debtors via discharge after liquidation or repayment plans, but many Asian systems are restrictive or absent (China lacks a personal insolvency system; stigma persists in Japan, Thailand, Malaysia, Indonesia, Singapore).
  - Examples of repayment-plan mechanisms:
    - Japan: “special civil rehabilitation proceedings” with a 3-year repayment plan.
    - Korea: individual rehabilitation with a 3-year repayment plan; court can grant discharge if creditors receive more than in bankruptcy.
    - Philippines: suspension of payments scheme for solvent individuals.
  - Enforcement against individuals is faster where out-of-court enforcement is permitted (Malaysia, Singapore); institutional quality influences effectiveness.

### Preventive Tools: Development, Gaps, and Practices
- Enterprise preventive tool findings:
  - Credit information systems often limited in enterprise coverage; better coverage in Korea, Malaysia, and Singapore.
  - Early warning systems are limited across ASEAN; Korea has developed bank-monitored stress indicators tied to restructuring.
  - Informal restructuring is widely used and culturally receptive across Asia; hybrid preventive insolvency procedures (pre-packs, schemes of arrangement) exist in some jurisdictions (Malaysia, Singapore, Japan, Korea).
- Household preventive tool findings:
  - Financial education, consumer protection, responsible lending, collateral registries, valuation regimes, and credit information systems form a legal infrastructure for prevention.
  - Informal household restructuring linked to debtor support programs and mediation by supervisors or consumer protection authorities.
  - Preventive measures are preferred due to social stigma and high personal bankruptcy costs; informal mechanisms and advice are prevalent.

### Gaps Identified in ASEAN Legal Frameworks and Institutional Priorities
- Major gaps:
  - Insufficient coverage of enterprise liabilities in credit information systems.
  - Lack of early warning systems beyond large companies.
  - Reliance on informal restructuring despite systemic gaps.
  - Ex-post household tools underdeveloped; personal bankruptcy regimes often repressive with legal sanctions and social stigma.
- Institutional and reform recommendations:
  - Favor market-based debtor–creditor negotiation; avoid ad-hoc across-the-board solutions.
  - Extend specialized courts and introduce a regulated insolvency profession.
  - Base reforms on systematic data collection and impact assessments.

### COVID-19 Specific Considerations and Sequential Pandemic Strategy
- Crisis constraints:
  - Preventive tools (credit information, early warning) have limited value once balance-sheet deterioration is widespread.
  - An increase in defaults and insolvency is to be expected in sectors exposed to the shock (tourism, retail, transportation).
- Value of restructuring and “flattening the curve”:
  - Emphasize out-of-court restructuring and tools that avoid formal insolvency to prevent overwhelming courts.
- Three-phase sequential strategy:
  - Phase 1: Freeze — suspend standard debt enforcement and insolvency activity during emergency to avoid negative legal/economic consequences.
  - Phase 2: Transition — after emergency measures lift, restart ordinary systems and deploy special out-of-court restructuring to increase resolution capacity.
  - Phase 3: Fighting debt overhang — deploy standard insolvency and debt enforcement tools and begin assessing systems to address gaps for longer-term reform.
- Supporting caution:
  - Overloaded courts can cause small enterprises to be liquidated without reorganization opportunities and delay large cases (Iverson, 2018).

### Conclusion and Policy Recommendations
- Overarching messages:
  - High private leverage poses medium-term risks to growth and creates "large monetary, legal and social costs with debt overhang and the formal resolution process."
  - Prevention is the first-best strategy; where over-indebtedness exists, quick and low cost resolution strategies are essential.
  - COVID-19 heightens urgency for appropriate debt resolution frameworks.
- Policy mix and priorities:
  - Macroprudential: LTVs, DTI and other tools are important; effectiveness depends on good information on liabilities and servicing capacity.
  - Fiscal: remove debt bias (e.g., mortgage interest deductions) and use reactive support carefully to avoid subsidizing failing enterprises.
  - Legal: prioritize preventive consumer measures (financial literacy, protection, responsible lending) and strengthen ex-post frameworks, especially for household insolvency.
  - Capacity building: preventive systems scale better under systemic shocks than ex-post court-based systems; invest in specialized courts and insolvency professions.
  - Country tailoring: prioritize ex-ante measures for corporates and ex-post tools for households; calibrate debtor–creditor rights to local characteristics and moral hazard considerations.
- Toolkit synergy:
  - Combining macroeconomic, macro-/micro-prudential, fiscal, and legal tools increases flexibility and cumulative effectiveness; prevention reduces caseloads and improves court efficiency.

*Source: wpiea2020172-print-pdf (IMF working paper excerpt).*

### Annex I. Methodology for the Analysis of Country Legal Systems______________________ 30

### Annex I. Methodology for the Analysis of Country Legal Systems______________________ 30

### Introduction
- Since the global financial crisis (GFC), highly accommodative international financial conditions have fueled the rise of private debt to unprecedented levels.
- As of end-2019:
  - Overall global debt stood at US$257 trillion, or 320 percent of global GDP.
  - Private debt (corporate and household) comprise three-fourths of global debt.
  - Asia accounts for nearly a third of global private debt, equivalent to approximately 250 percent of regional GDP.
- The COVID-19 pandemic has amplified risks from pre-existing high private indebtedness:
  - Emerging Asia is expected to contract by 0.8 percent in 2020 (June 2020 World Economic Outlook Update).
  - Large fiscal support and liquidity injections by major economies have helped, but bankruptcies and household debt distress are likely to rise as policy support is unwound.
  - Aggregate assets of the G10 central banks increased by US$6 trillion between mid-January and mid-June 2020, more than double the increase seen during the two years of the global financial crisis from December 2007 (June 2020 Global Financial Stability Update).

### Private Debt in Asia: Stylized Facts
- Trends and magnitudes:
  - Rapid rise in household debt after the GFC in several Asian economies (China, Korea, Thailand); household debt remains elevated in Korea and Thailand.
  - Corporate debt accelerated since 2008 in several countries, growing rapidly in China, Korea, and Singapore.
- Composition and drivers:
  - Growth of nonbank institutions and local bond markets (Asia Bond Market Initiative launched in 2002) contributed to changing financing patterns.
  - Housing-related debt drove household debt increases in Korea, Singapore, China, and Australia.
  - In Thailand, the rise in household debt was driven by consumer loans (auto and personal loans) and the less regulated cooperative sector.
- Income and servicing capacity:
  - In many Asian economies, the increase in debt has outpaced disposable income.
  - Debt as a share of disposable income is a closer measure of debt-servicing capacity than debt as a share of GDP.
  - The distribution of indebtedness matters: averages can mask small shares of very highly indebted segments that pose outsized risks.

### The Macroeconomic Costs of Over-Indebtedness
- General findings from literature:
  - Leverage supports financial intermediation, consumption, investment, and growth at moderate levels.
  - At high levels, leverage becomes a source of macroeconomic vulnerabilities—reducing investment, distorting resource allocation, and curtailing growth.
  - Over-indebted households reduce consumption as perceived permanent income and wealth fall.
- Threshold and nonlinear effects:
  - Cecchetti et al. (2011) estimate tipping points at 85 percent of GDP for households and 90 percent for corporates.
  - IMF (2017): increase in household debt has a positive contemporaneous relationship to GDP growth and consumption but a negative association three years ahead.
  - Threshold estimates cited:
    - Household debt-to-GDP threshold between 36 percent and 70 percent for positive long-term growth effects.
    - Negative long-run effects on consumption intensify as household debt-to-GDP exceeds 60 percent, and for GDP growth as it exceeds 80 percent (Lombardi et al., 2017).
  - Recent work explores time- and state-dependent thresholds (Yang and Su, 2018).

### Methodological Approach: Growth-at-Risk Application
- Rationale:
  - To capture nonlinearities and tail risks, the paper applies the Growth at Risk (GaR) framework (Adrian, Boyarchenko, and Giannone, 2019) to several Asian economies.
  - GaR links current macrofinancial conditions to quantiles of future output growth, providing insight into the entire growth distribution rather than a point estimate.
- Contributions using this methodology:
  - Examines how different types of private leverage present risks to GDP growth for selected Asian economies (Korea, Japan, Singapore, Thailand).
  - Quantifies the relative importance of macrofinancial drivers for downside growth risks (conditional growth distributions and shocks to private debt affecting distributions of real GDP growth).

### Policy-Relevant Observations and Implications
- Legal frameworks as complementary tools:
  - Legal and institutional structures can reinforce macroeconomic policies and macroprudential frameworks to enable proactive and orderly deleveraging, addressing both the stock and flow of debt.
  - International best practices for corporate debt resolution are well established; standards for household debt and for preventive practices are still emerging.
  - The COVID-19 shock underscores the need for swift government action to strengthen national private debt resolution frameworks and adapt them to different crisis phases.
- Macroeconomic policy toolkit:
  - Macroprudential measures (MPMs) are generally first-line defenses against excessive private debt in normal times (e.g., loan-to-value, debt-to-income limits).
  - Evidence suggests diminishing marginal returns to tighter macroprudential regulation—excessive tightening may push financial activity outside regulatory perimeters.
  - Monetary policy may be too blunt to target private debt directly.

### Paper Contributions and Structure (as stated)
- Three main contributions:
  - Application of the Growth-at-Risk framework to several Asian economies to evaluate leverage risks to GDP growth.
  - Inventory of legal techniques to prevent and treat corporate and household over-indebtedness in ASEAN-5, China, India, Japan, and Korea.
  - Development of a novel approach to assess and benchmark the effectiveness of legal frameworks, informing policy priorities for ASEAN countries in the context of COVID-19.
- Organization:
  - Section II: developments in corporate and household debt in ASEAN countries.
  - Section III: empirical analysis of leverage effects on growth using GaR for Korea, Japan, Singapore, and Thailand.
  - Section IV: macroeconomic options to address over-indebtedness.
  - Section V: survey and benchmarking of legal frameworks; sequential approach for pandemic response.
  - Section VI: conclusions and suggestions for future research.

*Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020172-print-pdf.pdf*

### 16.      To assess the risk to output growth from private leverage, the conditional

### wpiea2020172-print-pdf - 16.      To assess the risk to output growth from private leverage, the conditional

### Methodology: conditional GDP growth distribution estimation
- Quartile regressions of GDP growth are estimated on macrofinancial variable groups partitioned via principal components (up to the first three principal components) to reduce dimensionality.
- The quartile regression estimates are used to parametrically fit a t-skew (skewed t) conditional distribution of GDP growth.
- Quantile regressions are run for a country’s GDP growth y_t^q quarters ahead on regressor groups:
  - y_{t+q} = β_y^q y_t + β_f^q fin_t + β_tp^q tp_t + β_l^q lvg_t + ε_{t+q}^q
  - Regressor groups: output growth in period t; financial conditions; trade partner macroeconomic conditions; private leverage (household and corporate).
- Financial conditions include: credit growth, sovereign and corporate bond spreads, REER change and volatility, terms of trade, VIX, equity and house price growth.
- Trade partner indicators comprise US and China GDP growth.
- Private leverage comprises household and corporate debt to GDP ratios (level and change).
- Data frequency and sample: quarterly data from 1995:Q1 to 2018:Q4, with one period lags to address potential endogeneity.
- From estimated quantile coefficients, the parameters {μ_t, σ_t, α_t, ν_t} of the skewed t-distribution f are chosen to minimize squared distance between estimated quantiles (10, 25, 75, 90 percent) and the skewed t quantile function, following Adrian et al. 2019.

### Estimated conditional distributions and key findings
- Conditional distributions are estimated individually for Japan, Korea, Singapore, and Thailand (selection based on data availability).
- The left tail of the growth distribution is measured by GAR5% (the level of growth below which 5 percent of the growth distribution lies).
- Baseline results indicate risks are tilted to the downside over the medium term:
  - In most cases, both the mode (central tendency) and GAR5% decline over the medium term.
  - Baseline conditional GDP distributions are asymmetric with a fat left tail, highlighting nonlinear impacts of macrofinancial conditions (including leverage) on growth.
  - Estimated coefficients for household and corporate debt differ over the distribution, often larger at the left tail than at the mean and upper tail.
- Near term is defined as 4 quarters ahead; medium term is defined as 12 or 16 quarters ahead.

### Impact of shocks to private debt (household vs corporate)
- Shock definition: an increase is defined as a one standard deviation increase in the household or corporate debt partition.
- Comparative results (short run vs medium term; household in blue, corporate in red):
  - Time dimension:
    - In some cases both household and corporate debt appear to support growth in the short run.
    - An increase in household and corporate leverage does not result in a large leftward shift short run; in many cases the mode shifts to the right.
    - The boost to growth from household debt is more short-lived than that from corporate debt.
  - Distributional dimension:
    - In most countries, the drag of household debt on growth tends to last throughout the growth distribution.
    - Corporate debt drag tends to be concentrated at the lower end of the distribution.
    - A one standard deviation shock to the corporate debt/GDP ratio shifts the distribution left but by less over the medium term, with a smaller decline in the mode; the left tail thickens but by a smaller degree.
- Explanatory factors:
  - Preexisting levels and composition of debt matter: for many sample countries, household debt levels are higher than corporate debt levels.
  - Household debt has tended to fuel consumption (personal consumer loans) rather than productive investment.
  - Institutional differences: advanced corporate debt markets and insolvency frameworks provide more avenues to service and grow out of corporate leverage; options for managing household debt (particularly at lower income levels) may be more limited.
- Note: The outsize role of corporate debt at the tail reflects that the bottom percentile contains observations covering the Asian Financial Crisis.

### Policy implications and multipronged approach to over-indebtedness
- High private leverage can pose risks to growth in the medium term; policies should both prevent over-indebtedness and manage existing debt stocks.
- With expected increases in debt burdens and defaults due to the pandemic, a sequential approach focusing on “upscaling” certain tools can help flatten the curve of insolvencies.
- A multipronged framework combines macroeconomic policies, micro- and macro-prudential and fiscal tools, and legal measures:
  - Macroeconomic policies that support growth bolster households’ and corporates’ capacity to repay.
  - Institutional frameworks that build financial resilience enable countries to safely carry higher household debt; countries with stronger supervisory frameworks are better able to operate with high debt.
  - Macroprudential policies can address pockets of risk; frameworks to deal with corporate leverage are relatively underdeveloped but debt-at-risk analysis is becoming more sophisticated (example: Singapore). Existing measures have tended to focus on household debt. Several Asian countries have deployed and strengthened macroprudential measures to deal with high household debt.
  - Fiscal policy should remove tax distortions favoring debt over equity (debt bias):
    - For corporates: bias induced through deductibility of interest but not equity costs.
    - For households: bias induced from mortgage interest deductions.
    - Policy options: gradual reform of tax deductions for mortgage interest; limiting interest deductibility for corporates combined with an “allowance for corporate equity” system to mitigate revenue loss.
    - Fiscal support can be reactive (support to over-indebted households) but should avoid distorting competition or subsidizing failing enterprises.
  - Legal tools can be potent where macroeconomic policy space is constrained and can complement measures addressing credit growth outside the regulatory perimeter.
- The macroeconomic response to COVID-19 (fiscal, monetary, financial policy support) is covered elsewhere (April 2020 World Economic Outlook, Global Financial Stability Report and Fiscal Monitor; June 2020 WEO Update) and is not taken up in this section.

### Legal frameworks: ex-ante and ex-post measures
- Legal frameworks are critical for enforcing contractual rights, regulating creditor competition, preserving viable enterprises, and offering second chances to honest but unfortunate debtors.
- Effective strategy involves both preventive (ex-ante) and reactive (ex-post) measures:
  - Ex-ante measures typically avoid costly formal judicial insolvency proceedings; ex-post measures address over-indebtedness once it materializes and can involve judicial intervention.
- Emerging trend: focus on prevention of over-indebtedness via ex-ante tools; these are recent and lack international standards, with only emerging best practices.
- Inventory and evaluation performed for ASEAN-5 (Indonesia, Malaysia, The Philippines, Singapore, Thailand) plus China, Japan, India, and Korea; methodology for ranking ex-ante and ex-post tools is explained in Annex I.
- Examples of ex-ante tools:
  - Corporates: credit and financial information (credit registries/bureaus, audited financial statements), early warning systems, informal debt restructuring mechanisms.
  - Households: credit information systems, advice to debtors, informal debt restructuring (ADR, mediation, conciliation, arbitration), codes of conduct and reasonable forbearance.
- Examples of ex-post tools:
  - Corporates: reorganization procedures, liquidation proceedings, debt enforcement.
  - Households: bankruptcy liquidation (discharge of outstanding debt as fresh start for deserving debtors), bankruptcy repayment plans (rehabilitation), debt enforcement.
- Notes on effectiveness and design:
  - Reorganization preserves value, businesses, jobs, and contractual relationships; liquidation is the safety valve for non-viable enterprises and relies on efficient asset sales and developed markets.
  - Debt enforcement underpins insolvency systems and secured credit by promoting payment discipline and enabling restructuring negotiations.
  - Repayment plans allow debtors to retain part of assets while committing to a repayment schedule, with discharge after completion.

*Source: IMF working paper content (excerpted pages).*

### 27.      The development of preventive tools

### 27.      The development of preventive tools

### Overview
- Preventive tools for enterprise over-indebtedness aim to avoid the costs of formal judicial insolvency proceedings and reduce the economic burden associated with elevated debt levels, thereby preserving the viability of enterprises.
- Ex-ante tools rely on the availability of financial and economic information and include early warning systems and informal restructuring procedures.
- Figure 10 (referenced) summarizes ex-ante tools for enterprises in Asia, revealing gaps in early warning systems.

### Credit and financial information
- Findings:
  - Credit information systems tend to have a limited coverage of enterprises in Asian systems.
  - In some countries, systems are designed mostly to gather information about consumer credit (Japan, Thailand, and the Philippines).
  - In other cases, even if systems collect positive and negative information on enterprises, the main source of information is the banking sector (China and India).
  - Given the importance of non-bank financial institutions, coverage of enterprise liabilities offered by credit information systems is necessarily limited.
  - Credit information systems in Korea, Malaysia, and Singapore have achieved wider coverage of enterprise liabilities.
  - The availability and quality of financial and economic information on enterprises is increasing in Asian systems.
  - Progress has been made in implementing regimes based on international financial reporting standards and establishing auditing systems.
  - There is a clear gap between listed and unlisted companies regarding the quality of accounting information and rules on disclosure of financial statements.
  - In most Asian countries, only listed companies publish information on their financial statements.
  - There is a trend to develop electronic systems for the submission and publication of financial statements.

### Early warning systems
- Findings:
  - There is limited experience with early warning systems in ASEAN countries or in Asia more broadly.
  - The policy of developing early warning systems, especially for small and medium enterprises, originated in Europe (France, Denmark).
  - Only a few European countries have significant experience designing mechanisms that alert debtors of signs of distress and provide support for debt restructuring to prevent insolvency.
  - In advanced Asian economies, some reliance exists on leading banks to monitor SMEs and act promptly to address early-stage distress.
  - Korea has a developed system with stress indicators that are monitored by banks; this monitoring is tied to the corporate restructuring regime.
  - For large enterprises, internal audit and risk management perform a similar function to early warning systems.
  - Large enterprises in ASEAN and Asian countries tend to have internal audit due to statutory obligations or corporate governance codes applied to listed companies; risk management enhances internal monitoring effectiveness.

### Informal debt restructuring mechanisms
- Findings:
  - Since the 1997 Asian crisis, countries have built experience in the use of informal restructuring.
  - Informal restructuring was widely used in Thailand, Indonesia, Korea and Malaysia; Japan also developed strong practice in informal restructuring techniques.
  - The legal culture in Asia is extremely receptive to negotiated solutions compared to adversarial litigation, explaining the success of informal debt restructuring.
  - Administrative authority intervention can facilitate negotiations among parties and endorse principles informing those negotiations.
  - Several countries maintained enhanced debt restructuring mechanisms as part of the regular restructuring toolkit (Table 4 referenced).
- Limitations and trends:
  - Informal restructuring faces constraints when numerous creditors are involved and unanimous agreement is unlikely.
  - There is a trend to complement informal mechanisms with preventive insolvency procedures—hybrid procedures with limited judicial intervention and reduced cost/impact compared with full reorganization.
  - Although no direct experience with preventive insolvency procedures exists in Asia, some countries use procedures that perform a similar function:
    - Malaysia and Singapore: schemes of arrangement allow negotiation resulting in a binding agreement for the debtor and all creditors if requisite majorities are reached; court intervention is reduced compared with formal insolvency proceedings.
    - Japan and Korea: practice in “pre-packaged” reorganizations that resemble preventive insolvency procedures and allow companies to emerge after a short judicial procedure.
  - Additional support programs include advice for debt restructuring by financial and legal specialists and, in some cases, government guarantees.
  - For micro- and small enterprises, support can be connected with early warning systems and informal debt restructuring mechanisms (examples: Korea and Japan).

### Ex-Ante Tools for Households
- Objectives and general policy tools:
  - Preventive strategies seek to avoid the social cost of bankruptcy.
  - General policies include financial education, financial consumer protection, macroprudential tools and policies for responsible lending.
  - Legal infrastructure techniques include collateral registries, valuation regimes, and credit information systems—necessary for effectiveness of macroprudential tools.
  - The most important legal tool for prevention, informal restructuring of debt, depends on accuracy of registries and credit information systems.
  - Main preventive legal measures include: credit information systems, support and advice to debtors, and informal debt restructuring (including agreements to avoid insolvency).
- Findings:
  - Asian countries have developed preventive mechanisms to address household debt (Figure 11 referenced).
  - Progress in financial inclusion has resulted in higher levels of household debt.
  - Due to social stigma and severe personal consequences attached to bankruptcy, most legal systems in Asia have restructuring solutions that avoid bankruptcy.
- Credit information systems for households:
  - Credit information systems are instrumental for containing household debt and can collect information about credit relationships and payment patterns in transactions such as utilities and telecommunications.
  - Some credit information systems in Asia have reached wide coverage of the adult population (Figure 12 referenced).
  - The situation in ASEAN countries is diverse due to differences in access to finance.
  - Expanding coverage is necessary to implement macroprudential policies and legal strategies to address household over-indebtedness.
  - Footnote: Fintech companies are new players in many Asian economies, which also collect and use credit information (for instance, in China). A gap in coverage may exist where these entities are currently not included in most credit information systems.
- Support to debtors:
  - Specialized legal and financial advice is often needed for households with debt problems.
  - Key issue for debtor counseling is advice on different options consumers have for restructuring debts.
  - Advice can be provided through dedicated public institutions or associations of lawyers and insolvency practitioners as pro bono programs or agreements with the public sector (Table 5 referenced).
- Informal household debt restructuring:
  - Asia has experience with informal restructuring of household debt, typically linked to support programs to debtors.
  - This can involve a mediating role for financial supervisors or specialized financial consumer protection authorities (Table 6 referenced).
  - Agreements with creditors may be the last opportunity to avoid bankruptcy, given extremely high costs of personal bankruptcy in Asian countries; legal systems tend to offer a last chance via agreements or settlements (Table 7 referenced).

### Ex-Post Tools for Corporates
- Role:
  - Ex-post tools are necessary when enterprises become over-indebted to preserve viable enterprises via reorganization and redeploy assets via liquidation for non-viable enterprises.
  - Effective insolvency regimes minimize creditor losses and are associated with lower excessive leverage.
- Progress and status:
  - Asian insolvency systems have made significant progress since the Asian crisis; many countries introduced reforms in the last decade (Philippines, Singapore, and Malaysia).
  - Reforms have focused on introduction and improvement of reorganization procedures.
  - Most countries implemented insolvency frameworks largely inspired by best international practice (Figure 13 referenced).
- Reorganization:
  - Most Asian countries, including ASEAN, have introduced reorganization procedures; they are integral in large economies (China, India, Japan, and Korea).
  - Differences in practice:
    - Reorganizations are not frequent in China.
    - In India, an attempt at reorganization is an essential part of every corporate insolvency procedure.
    - Korea and Japan have reorganization regimes closer to the international standard.
    - Thailand introduced reorganization procedures after the crisis and has amended the law for further improvements.
    - Indonesia and the Philippines include reorganization procedures.
    - Singapore and Malaysia recently reformed systems to introduce reorganization procedures.
  - Important differences in regulation of reorganization procedures impact their effectiveness.
- Liquidation:
  - Liquidation proceedings are not particularly effective in Asia.
  - Value destruction occurs because selling businesses as a going concern is difficult in the absence of large and developed markets for distressed enterprises; piecemeal asset sales result in low recoveries and increased process costs, especially where qualified insolvency professionals are absent.
- Debt enforcement:
  - Enforcement systems are generally effective in varying degrees.
  - Most countries require a judicial procedure for enforcement of claims, including secured claims (China, Japan, Korea, Philippines, Indonesia, and Thailand).
  - Enforcement of secured claims can take place out of court in some countries (India, Malaysia, and Singapore), suggesting a division between civil law and common law systems.
  - Institutional quality (courts and supporting professionals) directly affects effectiveness of ex-post tools.
  - Some countries have specialized insolvency courts (Thailand, Korea, China, and India).
  - Development of a qualified insolvency profession is pending in most Asian systems; India has implemented a new framework for the insolvency profession, and Singapore is planning to introduce a new regime for insolvency professionals.
  - Footnote: Creation of asset management companies (AMCs) can increase effectiveness of ex-post tools due to specialization and concentration of creditor rights, but AMCs can also have anticompetitive effects.

### Ex-Post Tools for Households
- Objectives and mechanisms:
  - Ex-post measures for household over-indebtedness emphasize rehabilitating debtors via discharge of debt when legal conditions are met.
  - Typical conditions include surrendering all assets except protected exemptions and possibly devoting income after living expenses to debt payments for a specified period before discharge.
- Current issues and practices:
  - Personal insolvency regulation is an outstanding issue in most Asian systems; not all Asian countries have a personal insolvency system (China is an example).
  - In some countries, personal insolvency is still inspired by notions of retribution against the debtor (Malaysia or Singapore).
  - In the absence of debt relief mechanisms, debtors may withdraw from the formal economy to escape creditor action.
  - Contributing factors to low use of personal insolvency include stigma (Japan, Thailand, Malaysia, Indonesia, and Singapore), and cost and duration of the process.
  - Figure 14 (referenced) summarizes availability of ex-post tools for household debt in select Asian countries.
- Personal bankruptcy — liquidation:
  - Liquidation of the estate provides deserving debtors with a discharge of outstanding debt; for individuals, liquidation operates as a “fresh start” by discharging debt (World Bank, 2014).
  - Discharge should only be granted to debtors not engaged in fraudulent conduct.
  - Asian countries tend to be restrictive in discharging debts of bankrupt individuals.
  - Japan and Korea are closer to a fresh start policy, but discharge policies remain restrictive elsewhere (Table 8 referenced).
  - Social prejudice towards bankrupt debtors hampers wider use even in Japan and Korea.
  - For debtors with no assets, different approaches may be required since a process that costs more than the debts is unreasonable.
  - Korea and Japan practice “simultaneous termination” where bankruptcies with no assets are terminated and only the discharge portion continues; other countries may consider mechanisms for granting discharge to debtors with no assets.
- Personal bankruptcy — repayment plans:
  - Some countries incorporate repayment plans in personal insolvency legislation.
    - Japan introduced “special civil rehabilitation proceedings” where the debtor commits to a 3-year repayment plan (model following the U.S.).
    - Korean individual rehabilitation proceedings require payments within a 3-year repayment plan; the court can give a discharge even if not all payments are made, so long as creditors receive more than in bankruptcy.
    - In the Philippines, a suspension of payments scheme is granted to individual debtors (similar to enterprises), provided the debtor is solvent.
- Debt enforcement for individuals:
  - Debt enforcement tends to be effective in most Asian systems, especially in advanced economies, but remains challenging in lower income economies due to excessive delays and high collection costs.
  - In some countries, enforcement of secured debts against individuals is fast because enforcement without court intervention is possible (Malaysia, Singapore).
  - Institutional framework (specialized courts for small claims, specialized enforcement agencies) influences effectiveness.
  - Development of an insolvency profession is important because modern systems rely on minimal judicial intervention and perform functions via qualified insolvency professionals.

*Source: wpiea2020172-print-pdf - 27.      The development of preventive tools*

### 57.      An evaluation of legal frameworks in ASEAN countries reveal certain gaps. The

### 57.      An evaluation of legal frameworks in ASEAN countries reveal certain gaps. The

### Key findings: gaps in ASEAN legal frameworks (paragraphs 57–59)
- Critical ex-ante tools for over-indebted enterprises are missing:
  - Insufficient coverage of enterprise liabilities in credit information systems.
  - Lack of early warning systems; existing mechanisms "only apply to large companies."
  - Continued reliance on informal debt restructuring despite these gaps.
- Ex-post tools for over-indebted households need development:
  - Personal bankruptcy regimes are described as "repressive" and carry "legal sanctions and social stigma," leading policymakers to prioritize preventive tools.
  - Recommendation: include personal insolvency procedures that grant a discharge based on liquidation or a repayment plan.
- Market-based approach favored:
  - Debt resolution mechanisms should rely on debtor–creditor negotiation to reach efficient economic solutions (restructuring or liquidation).
  - Ad-hoc or across-the-board solutions are inefficient because they "fail to adequately distinguish the situation of different debtors."
- Institutional and capacity improvements recommended:
  - Extend specialized courts.
  - Introduce a regulated insolvency profession to improve institutional capacity and effectiveness.
- Reform design recommendation:
  - Base new legal reforms on systematic data collection and impact assessments; cite Garrido et al., 2019 as supporting evidence.

*Source: wpiea2020172-print-pdf - 57.      An evaluation of legal frameworks in ASEAN countries reveal certain gaps.*

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### The COVID-19 shock and private debt resolution (paragraphs 60–62)
- Economic impact of COVID-19 in ASEAN:
  - Severe effects on healthcare systems and expected more severe economic impact.
  - Uncertainty for sectors such as "tourism, retail, transportation."
  - "An increase in defaults and insolvency is to be expected."
- Preventive measures face limitations in a crisis:
  - Credit information and early warning systems are designed to detect buildup of debt ex-ante but "will not produce valuable information" once risks have materialized widely.
  - Wide deterioration in balance sheets reduces the utility of credit information and early warning systems.
- Value of restructuring and "flattening the curve":
  - Debt restructuring tools that avoid formal insolvency proceedings help prevent collapse of formal insolvency systems under a wave of petitions.
  - Analogy: as in healthcare, adopt measures that "flatten the curve" of insolvencies to preserve judiciary capacity.
- Figure 15 (textual summary):
  - Household:
    - Credit Information systems: 
    - Advice to Debtors: 
    - Informal Debt Restructurings: 
  - Enterprise:
    - Financial and Economic Information: 
    - Early Warning Systems: 
    - Informal Debt Restructurings: 

*Source: wpiea2020172-print-pdf - 57.      An evaluation of legal frameworks in ASEAN countries reveal certain gaps.*

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### Sequential strategy to manage pandemic-induced insolvency surge (paragraph 62 and Figure 16)
- Rationale:
  - Courts and insolvency procedures have limited capacity; reforms increasing court capacity take time.
  - Expanding out-of-court (ex-ante) debt restructuring mechanisms can better handle waves of bankruptcies.
- Three-phase strategy (Figure 16):
  - Phase 1: Freeze
    - "In the first phase, the debt enforcement and informal restructuring mechanisms will be affected by the emergency measures."
    - Action: freeze standard debt enforcement and insolvency activity to avoid negative legal and economic consequences.
  - Phase 2: Transition
    - After emergency measures lift, ordinary systems restart; in severely affected countries, special out-of-court restructuring and other measures are needed to "flatten the curve" and increase capacity to resolve viable firms.
  - Phase 3: Fighting debt overhang
    - Use all standard insolvency and debt enforcement tools (referenced as Section V).
    - Countries should "start assessing their systems to address the gaps as soon as possible" given the time needed for legal reforms.
- Supporting evidence:
  - Iverson (2018) documents negative effects of overloaded bankruptcy courts: small enterprises liquidated without chance to reorganize; large cases delayed.

*Source: wpiea2020172-print-pdf - 57.      An evaluation of legal frameworks in ASEAN countries reveal certain gaps.*

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### Conclusion and policy recommendations (paragraphs 63–66)
- Overarching assessment:
  - High private leverage poses medium-term risks to growth and creates "large monetary, legal and social costs with debt overhang and the formal resolution process."
  - Prevention costs can be lower than treatment costs; avoid excessive debt as the "first best strategy."
  - Where over-indebtedness exists, "quick and low cost resolution strategies" are important to rehabilitate economic agents.
  - COVID-19 increases urgency to set up appropriate debt resolution frameworks.
- Comprehensive approach across policy domains:
  - Macroprudential policies:
    - Important as preventive and reactive measures (example instruments: LTVs, DTI).
    - Effectiveness depends on "good information on overall liabilities, servicing capacity, or collateral values."
  - Fiscal policies:
    - Preventive: e.g., "remove debt bias" by eliminating mortgage deductions in personal income tax.
    - Reactive: provide support to over-indebted households.
    - Caution: fiscal measures should "not distort competition (i.e. no subsidies for failing enterprises)."
  - Legal policies:
    - Focus on preventive measures for consumers: financial literacy, consumer protection, responsible lending.
    - Combine with ex-post measures that influence economic actors and improve ex-ante effectiveness.
  - Capacity considerations:
    - Preventive systems handle large numbers of indebted agents better than ex-post systems, which can become overwhelmed in systemic deleveraging.
  - Crisis guidance:
    - In crises like COVID-19, pursue sequential approach and out-of-court settlement procedures to expedite orderly debt resolution without overwhelming the judiciary.
- Country-specific tailoring:
  - Prioritize ex-ante measures for corporates and ex-post tools for households.
  - Use spider charts as a guide to target reforms where gaps are largest, considering time required to implement legal reforms.
  - Balance moral hazard of discharge with encouragement of risk taking and innovation; calibrate debtor vs. creditor rights per country characteristics.
- Toolkit synergy:
  - A broader toolkit increases flexibility and cumulative effectiveness.
  - Effective prevention reduces caseload and improves court efficiency for cases that reach the courts.

*Source: wpiea2020172-print-pdf - 57.      An evaluation of legal frameworks in ASEAN countries reveal certain gaps.*

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### Methodology note (Annex I, paragraphs on methodology)
- Scope:
  - Spider charts (Figures 9–13) represent a qualitative assessment of ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) and four large Asian countries (China, India, Japan, and Korea).
  - Assessment based on legislation analysis and secondary sources.
- Focus:
  - Existence of building blocks for prevention and treatment of over-indebtedness in corporate and household sectors.
  - Effectiveness incorporation is "approximative" due to limited empirical information.
- Rating scale:
  - Transposition of ROSC methodology ratings:
    - "non-compliant, 0-25; materially non-compliant, 26-50; largely compliant, 51-75; fully compliant, 76-100."
- Detailed assessment blocks and sub-indicators provided for:
  - Ex Ante – Enterprise (Financial and economic information; Early warning systems; Informal debt restructuring and preventive insolvency procedures).
  - Ex Ante – Household (Credit information systems; Advice and support to debtors; Informal debt restructuring and agreements to avoid insolvency).
  - Ex Post – Enterprise (Reorganization; Liquidation; Debt enforcement).
  - Ex Post – Household (Personal bankruptcy; Personal bankruptcy – repayment plans; Debt enforcement).
- Specific sub-indicators enumerated in the methodology (listed verbatim in the source) inform qualitative ratings.

*Source: wpiea2020172-print-pdf - 57.      An evaluation of legal frameworks in ASEAN countries reveal certain gaps.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020172-print-pdf.pdf_