KUCHING: Moody’s Investors Service (Moody’s) says Asia will remain among the fastest growing region globally in 2017, but the current challenging global environment could test the robust credit fundamentals of Asian sovereigns, corporates and banks.
“Challenges surrounding China’s structural reforms, higher interest rates in the US, rising protectionist sentiment in advanced economies, potential political shifts in the European Union (EU), and elevated leverage in Asian economies all pose risks in the year ahead,” said Moody’s Asia Pacific managing director and chief credit officer Michael Taylor, in a statement.
“Nevertheless, Asian sovereigns, companies and banking systems demonstrate inherent strengths that will help them withstand these challenges,” added Taylor.
According to Moody’s ‘Asia Credit – 2017 Outlook: Challenging global environment to test Asia’s robust credit fundamentals’ report, Asian industrial activity and merchandise exports showed signs of stabilisation – following a mild contraction in 2016 – which bodes well for future economic growth.
Although GDP in some Asian economies, such as Mongolia (Caa1 stable), Malaysia (A3 stable) and Papua New Guinea (B2 stable), have fallen short of Moody’s previous forecasts, Moody’s expected that the near-term growth outlook in the region will improve.
However, on a closer look at export performance, Moody’s reported that potential changes to US trade policy and the rise of protectionism globally could pose greater risks to high-value manufacturing exporters in Asia, particularly Malaysia, Korea and Taiwan.
“Significantly reduced US engagement in global trade under the Trump Administration would be a dramatic policy divergence from the Obama Administration, and could pose downside risks to the US’ major trade and investment partners,” it said.
Aside from that, it pointed out that the withdrawal by the US from the Trans-Pacific Partnership (TPP) represents a lost opportunity for Asia, especially for countries that would have substantially expanded their export access to major markets.
“In addition, the end of TPP could slow the reform momentum the deal had fuelled. In particular, the lost export and growth opportunities are material for Vietnam and Malaysia, which would have benefited from the opening up of trade with the US, and relatively large foreign direct investment inflows over the long-term,” it highlighted.
Meanwhile, on the financial aspect of the Asian region, Moody’s noted that for the banking sector, it placed negative outlooks on six of 16 banking systems in Asia Pacific.
In terms of individual bank outlooks, it added, one-quarter of Asian banks carry negative outlooks compared to six per cent at year-end 2015.
This result mainly reflects Moody’s expectation that a more challenging operating environment for the banks in the region could lead to a deterioration in their asset quality and profitability.
The divergence in Moody’s outlooks for Asian banks (negative) and corporates (stable) is explained by the banks’ much higher exposure to unrated companies, and to overleveraged households in some countries.
“Further downside risks for the banks come from the buildup of corporate and household indebtedness in some Asian economies, downward pressures on domestic currencies – amid volatile capital flows – and elevated housing prices in parts of the region,” it added.
Moody’s also pointed out that monetary policy tightening by the Fed could have significant effects on capital flows to Asian economies.
“There was a reversal of capital flows from the region late in 2016, although outflows slowed later in the year and so far in 2017. Sustained capital outflows from Asia would place downward pressure on Asian currencies vis-a-vis the US dollar, which would weight on companies with domestic currency cash flow that have borrowed in US dollars.
“Such companies are generally outside of our portfolio of rated firms in Asia. This development would affect corporate sector profitability and borrowing conditions, and gradually lead to asset quality challenges in the banking sector.
“A disorderly response to the Fed’s tightening would also create potential financial market volatility, a credit negative for Asian debt issuers,” it explained.
Nonetheless, it highlighted that relatively solid macro fundamentals in Asia would help mitigate the negative impact.
“Most Asian sovereigns have ample foreign exchange reserves to cover current account deficits and external debt payments, with the exception of Mongolia, and to a lesser extent, Malaysia and Sri Lanka,” it said.
Moody’s added, “Moreover, the vast majority of Asian banks are deposit-funded, a credit strength. Another buffer is the banks’ good level of reserves against problem loans, with an average 120 per cent ratio for Moody’s-rated banks.”
With non-financial corporates in Asia, the report said that for Moody’s-rated non-financial companies in Asia, stabilising economic growth and a mild recovery in global commodity prices would support revenues and cash flow for many sectors.
“In particular, Asian companies should see a slight improvement in leverage metrics in 2017, owing to moderate earnings growth. Moody’s estimates that debt per earnings before interest, tax, depreciation and amortisation (EBITDA) for Moody’s-rated corporates remained elevated at 5.1-folds at end-2016, on a trimmed average basis,” it added.
Moody’s expected leverage on the same basis to improve slightly to 4.9-folds in 2017 which would mark a turning point as leverage has deteriorated steadily from 3.8-folds in 2011.
Overall, it said, “During 2017, global GDP growth will increase very mildly but remain historically weak; thereby limiting the growth drivers for Asian exporters. Challenges surrounding China’s structural reforms, higher interest rates in the US, rising protectionist sentiment in advanced economies, potential political shifts in the EU and elevated leverage in Asian economies all pose risks in the year ahead.
“Nevertheless, Asian sovereigns, companies and banking systems demonstrate inherent strengths that will help them withstand these challenges.”