TEMPO.CO, Jakarta - Loans to businesses and households in Southeast Asia are growing at their slowest pace in five years, but the region's most indebted economies aren't becoming any less leveraged. Because of deflation, borrowers are at risk of shouldering heavier debt burdens.

In Singapore, bank loans grew 3.26 percent in February from a year earlier, official data published on Tuesday shows, the slowest since November 2009. In Thailand, loan growth is also far below the rates seen after the 2008 global crisis when the authorities unleashed liquidity to revive the economy. But outstanding loans remain staggering. The Asian Development Bank says debt in Singapore, Thailand and Malaysia is now equal to at least twice the size of their gross domestic product, fuelled by inflows of capital which funded bank loans and bond sales.

The ability of borrowers to pay down debts will be tested if deflationary pressures that crept into the region four months ago via Thailand increase. A long spell of falling prices erodes corporate revenues, spurs businesses to lower wages, and slams the brakes on economic growth. Look at Japan. "Deflation will increase the real cost of debt servicing as real rates rise and will keep nominal GDP growth weak," Morgan Stanley wrote in a research note.

Central bankers are in a quandary. Because of high debt, they are reluctant to lower interest rates and encourage borrowing. But without lower interest rates, their economies risk getting stuck in a deflationary funk of low growth and rising debt. Singapore bit the bullet and eased monetary policy in late January. Thailand followed suit this month. Both have fallen into mild deflation, chiefly because of sliding global energy prices. Malaysia, where consumer prices rose just 0.1 percent in February, has stood pat on interest rates.

The authorities should tighten prudential regulations to direct credit away from risky borrowers but still ensure real interest rates are low enough for productive sectors to access credit, Chetan Ahya, an economist at Morgan Stanley, told Reuters.

REUTERS