Tackling Private Over-Indebtedness in Asia: Economic and Legal Aspects

IMF Working Papers, August 28, 2020

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Canonical URL: Tackling Private Over-Indebtedness in Asia: Economic and Legal Aspects

Authors: Jose M Garrido, Sanaa Nadeem, Nagwa Riad, Anjum Rosha, Chanda M DeLong, Nadia Rendak
Published: August 28, 2020
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781513554952.001

Context: Interest rates remaining “too low for too long” since the Global Financial Crisis contributed to a buildup in private leverage in emerging economies; these vulnerabilities have been laid bare by the COVID-19 shock.
Framework: Employs the growth at risk framework (Adrian, Boyarchenko, and Giannone, 2019) to examine how different types of private leverage present risks to future GDP growth in Asian economies.
Key empirical findings:
- Private leverage can boost GDP growth in the near term.
- Private leverage can increase the risks of low growth over the medium term.
- For the paper’s sample, household debt poses a larger drag on future GDP growth than corporate debt.

Scope: Second part of the paper provides an overview of a strategy for prevention and resolution of over-indebtedness, with a focus on legal tools and considerations to account for the consequences of the COVID-19 pandemic.
Emphasis: Legal techniques to prevent and treat corporate and household over-indebtedness, and benchmarking legal frameworks against international best practice.

Coverage: Uses a novel cross-country survey to examine the role of legal techniques.
Jurisdictions benchmarked: ASEAN-5, China, India, Japan and Korea.
Purpose: To inform a country-specific prioritized approach to strengthening legal frameworks addressing corporate and household over-indebtedness.

Balance short-term growth and medium-term risks: Recognize that while private leverage may support near-term GDP growth, it raises medium-term downside risks that warrant policy attention.
Prioritize household debt vulnerabilities: Given that household debt imposes a larger drag on future GDP growth in the sample, policy and legal reforms should prioritize household debt resolution and prevention tools alongside corporate measures.
Strengthen legal frameworks: Implement and sequence legal techniques—prevention, restructuring, insolvency, and enforcement—benchmarking against international best practice and adapting to pandemic-related constraints.
Adopt a country-specific prioritized approach: Use cross-country benchmarking results to design prioritized legal and regulatory reforms tailored to domestic conditions and pandemic repercussions.

This summary is based on "Tackling Private Over-Indebtedness in Asia: Economic and Legal Aspects", IMF Working Paper No. 2020/172, August 28, 2020.