Asia's private sector debt service ratio keeps on rising

It's apparently a dirty secret.

Asian central banks are bluffing, it seems.

According to a research note from UBS, outside of India UBS sees little hope that cutting rates can boost economic growth.

Rates across Asia have fallen since 2008, but the dirty secret is that Asia's private sector debt service ratio continues to rise, said the report.

Here's more from UBS:

That's important for economies and equity markets. Changes in debt service ratios have historically been correlated with Asia ex-Japan equity valuations per UBS Asia Strategist Niall MacLeod's earlier work.

Rising debt service ratios tend to de-rate equities while falling debt service ratios lead to improved valuations. Debt service is obviously a function of the level of interest rates and debt to income ratios. What's happened in Asia is that the debt to income ratio has risen faster than central banks' willingness to reduce rates.

Asian central banks are naturally torn between supporting economic growth in the near term, which calls for bringing rates down faster, versus worrying about the eventual fallout from large credit expansions in the long term, which argues for tightening policy.

This is unlikely to change next year. In our Outlook for Asia we argue once again that most central banks in Asia will lower rates further next year with debt also growing faster than income again. Once Asia's debt service increases central banks will feel the need to lower nominal rates to prevent debt service from cutting further into economic growth. But as we've said many times before Asia is suffering from diminishing marginal benefits of adding more leverage and at some point much of the region will need to slow credit below income growth to get off this path.

Outliers in Asia cut in both directions. India is well known to be close to the bottom of its credit cycle and lowering rates there will likely be an effort to reflate. The same could be said of Indonesia, too.

However, lowering rates along with higher US rates next year comes with challenges flagged previously. Unfortunately for Singapore and Hong Kong, interest rates and debt service ratios will likely rise because of strong links to US interest rates. And you probably know how that turns out.