With the global credit cycle getting tighter, many Southeast Asian countries face the risk of elevated household debt increasing the refinancing pressure on mortgage and consumer credit, Moody's has said.
Malaysia and Thailand are the most vulnerable due to high overall indebtedness and a rapid pace of credit accumulation.
Household debt as a share of GDP was at 87% for Malaysia and 82% for Thailand at the end of 2013, the rating agency noted.
However, the risk for private consumption growth and banks' asset quality due to the high level of household debt in the region is manageable overall.
"While elevated household debt could place refinancing pressure on mortgage and consumer credit as the global credit cycle gradually tightens, Southeast Asian bank systems are largely sound and can withstand significant asset deterioration," Rahul Ghosh, a Moody's Vice President and Senior Research Analyst, said.
"In addition, if these stresses begin to affect the wider economy, regional governments can implement counter-cyclical policies to support domestic demand."
With the US Federal Reserve likely to raise rates in 2015, capital inflows into Southeast Asia will moderate. Rapid growth in consumer credit has led to several pockets of high household leverage.
Household debt relative to income levels in Malaysia and Thailand is also elevated, suggesting that the debt-servicing capacity in both is likely to become problematic as credit conditions become less favourable.
Banking System, Inflation
Still, regional banking systems show strong internal defences; high capitalisation levels, robust profitability and low reliance on wholesale funding will protect Southeast Asian banks as the economy changes, Moody's said.
But in the event that these stresses pressure household balance sheet or property prices, relatively subdued domestic inflation in most economies in the region give central banks room to loosen their monetary policy stances if necessary.
Also, public balance sheets across Southeast Asia are relatively healthy when compared to global peers, which suggests that governments could initiate stimulus packages and spending programmes, if required, to support domestic demand.
Overall, Moody's thinks that although the household sector in some of the region's economies may experience pressure as a result of higher global interest rates, the risks are well contained and can be mitigated by government action.