Why Malaysia and Thailand are the most vulnerable to rising rates

There's high household debt in GDP share.

With the US Federal Reserve likely to raise rates in 2015, capital inflows into Southeast Asia will moderate.

According to a release from Moody’s Investors Service, further, rapid growth in consumer credit has led to several pockets of high household leverage.

The release noted that Malaysia and Thailand are most vulnerable to rising rates, due to high overall indebtedness and a rapid pace of credit accumulation in recent years.

Household debt as a share of GDP was high for both, at 87% for Malaysia, and 82% for Thailand, at the end of 2013, says Moody's.

In addition, household debt relative to income levels in the two countries is also elevated, suggesting that debt-servicing capacity in both is likely to become problematic as credit conditions become less favorable, says the rating agency.

Here’s more from Moody’s Investors Service:

Malaysia and Thailand stand out as most exposed to rising rates in Southeast Asia due to their high overall level of indebtedness and rapid pace of credit accumulation in recent years.

Perhaps more importantly, Malaysia and Thailand have experienced the fastest increase in household indebtedness over the past five years.

Household debt in Malaysia and Thailand is also elevated relative to income levels, suggesting that debt-servicing capacity in both countries is likely to become a bigger problem as credit conditions sour.

Based on central bank data, Thailand’s debt servicing ratio rose to 34% in March 2013 from 30% in 2011, while Malaysia’s rose to 44% in 2013 from 40% in 2008.

It is worth noting that household leverage in Singapore and Malaysia is somewhat distorted by mandatory pension schemes that allow households to take on residential mortgages secured by their fund balances.

In both Singapore and Malaysia, therefore, household debt appears more manageable when measured against household financial assets, at 15% and 45%, respectively.