Can Asia overcome its addiction to debt? That is the question across the region as economies slow and borrowing costs rise. After more than a decade of often blistering growth, many fear that Asia’s golden era may be drawing to a close.

When George Magnus, the economist, penned his report ‘Is Asia’s miracle over?’ in 2012, the feedback was sceptical. Many presumed the financial crisis was little more than a bump for the world’s most dynamic region, and the rebound would prove lasting.

But now, with exports still weak, quantitative easing in the west being unwound, and domestic economies laden with debt, the idea that the Asian boom has already peaked is rapidly going mainstream.

Much of Asia is faltering. Credit intensity — the amount of borrowing needed to generate a unit of output — has surged, while productivity growth has tumbled

Asia’s economic miracle, with China at its heart, has been a driving force for the region and the rest of the world. It has halved the proportion of people living on less than $2 a day over the past decade. Average incomes have doubled in South Korea, Malaysia and Thailand, and risen more than fivefold in China and Indonesia, according to the Asian Development Bank. Since China joined the World Trade Organisation in 2002, emerging Asia’s share of global gross domestic product has risen from 11pc to 21pc, says the International Monetary Fund. The contribution to growth has been far greater.

Even during the financial crisis, Asia powered ahead on the back of China’s mammoth stimulus package and record low borrowing costs as central banks across the world slashed rates. Those measures boosted demand for Asian exports but, more importantly, helped companies and consumers fuel domestic growth with cheap credit. While much has been written about China’s debt addiction, the experience is far from unique within Asia. Credit levels have risen sharply since 2008 in Hong Kong, Singapore, Thailand and Malaysia, while already high levels of household debt in South Korea and Taiwan have tracked even higher.

During times of accelerating growth, that might not be a cause for concern. But now much of Asia is faltering. Credit intensity — the amount of borrowing needed to generate a unit of output — has surged, while productivity growth has tumbled. The debt train appears to be fast running out of track just as the world prepares for higher interest rates.

“There’s no problem in having the debt to GDP growth go up. It doesn’t have to collapse necessarily as long as you can turn around productivity growth,” says Fred Neumann, Asian economist at HSBC. “The big problem Asia faces is to implement structural reforms that are politically unpalatable before a crisis actually occurs.”

Asia’s traditional engine of exports is failing to fire. Thanks partly to rising costs at home and changes in the way developed economies consume, exports to the US and the eurozone have dropped from 14pc of developing Asia’s GDP in 2005 to just over half that level now, says HSBC.

Without the export boost, Daiwa estimates Asian economies, excluding Japan, will grow 5.8pc next year, from 9.2pc in 2010. The time when Asia grew at near double digits appears to have passed.

While those rates still seem enviable compared with the west, Duncan Wooldridge, chief Asian economist at UBS, says the region now faces its own version of a recession, in which economies continue to expand but far below their historical average.

“If we’ve exhausted our ability to put a high floor under [economic] growth with rapid credit growth, and we’re not going to experience a boomtime in exports, then how can growth in Asia return to its long-term path? It’s highly unlikely,” says Mr Wooldridge. “The most likely scenario is we will be stuck in a lower-growth trajectory for some time to come.”

The trend can be reversed only with deep, far-reaching reform — something that has rarely happened without a financial crisis as a spark, he adds.

The onset of tapering by the Federal Reserve could be the high water mark for the Asian miracle. Borrowing costs across the world are already ticking higher even before interest rates rise — something that will test Asia’s ability to pay back its debts.

The search for a new economic model will challenge policymakers and business leaders. “The basic point here is we’re not going to repeat the growth rates we had over the previous decade,” says Bruce Kasman, chief global economist at JPMorgan.

“We have an adjustment to wean economies off of a model that was very credit-dependent . . . The success or failure of that adjustment will tell you a lot about whether we find the balance with growth that isn’t as strong, but is still potentially pretty solid and positive for the global economy. History doesn’t speak too well to how these adjustments play out.”

Monetary Policy — Loose money in the US has fed through to Asia

Ultra-loose monetary policy in the west — particularly the US — has had a big impact on Asian economies. It forced central banks to cut interest rates to quell currency appreciation and so fuelled a large-scale expansion in credit levels in a number of countries. Indonesia, for example, kept rates at a record low even as it recorded annual growth of more than 6pc. Last year’s ‘taper tantrum’, which prompted sudden outflows and a sharp currency fall, forced a rapid change of tack, but few other countries have increased rates. Low borrowing costs and ample access to credit have also helped push asset prices, particularly for housing, to record levels in places such as Hong Kong and Singapore.

Debt before growth- credit is running well ahead of economic growth

The rise in debt among consumers and companies has helped boost growth at a time of weak exports. Some of that growth has come through infrastructure and construction projects, not least in China. Another part is a result of debt-backed consumption of products such as cars and housing, as is the case in Thailand. Strong wage increases have also helped, although that too has sometimes been underwritten with debt. But growth across the region is beginning to slow.

Credit intensity — economies now need more debt to generate growth

Most Asian economies have experienced a surge in credit intensity — a measure of the amount of borrowing required to generate a unit of growth. Even as debt has been added to an economy, growth has continued to track lower. In China the problem is particularly acute following the mammoth stimulus package launched in 2009.

With credit intensity already so high, using more debt to boost growth becomes increasingly difficult, expensive and risky.

Reform lag — productivity is slumping as debt levels soar

The low cost of credit, and the resultant boost to growth through spending by companies and consumers, has delayed the implementation of much-needed structural reforms in a number of economies, including China, India and Indonesia. That has resulted in a slump in productivity, something that must be reversed if the region is going to bounce back, or even simply maintain growth levels.

The big question is whether this can be done before some form of financial crisis occurs.

Exports — Asia’s export engine no longer delivers as much growth

Exports to developed markets as a share of GDP have been falling across Asia since the financial crisis. Various factors are at play, including stronger local currencies, higher wage costs and different growth drivers in the west, such as the US shale gas boom. While some economists believe stronger European growth will eventually feed through to trade, others take the view that the boom years brought about by smartphone and tablet sales are unlikely to return soon, and that Asia will need to buy more of its own products. The question is how to pay for that consumption.

Published in Dawn, Economic & Business, May 19th, 2014