The economic fallout from the current eurozone crisis should be manageable for most Asian corporates, although certain sectors and geographies are more vulnerable than others, according to Fitch Ratings.
The first route by which the eurozone crisis could be transmitted to Asia is reduced demand for Asian exports. But those companies primarily reliant on exports to European countries represent a relatively small group. That’s because a significant amount of trade in Asia, and particularly growth in that trade over the past few years, has been within the region. For example, Japanese consumer electronics companies such as Sony are more exposed to economic weakness in developed European markets than Korean competitors such as Samsung, with its focus on developing markets.
Both Japanese and Korean automakers would feel some demand impact from a further EU slowdown. But Japanese auto manufacturers are more exposed to a further slowdown in the US than to Europe. The effect on Korean manufacturers will be reduced by product substitution in their favour in both regions, given the quality and relative cost of their products.
At a macroeconomic level Fitch considers China, India and Indonesia to be relatively less exposed to global growth shocks compared to the smaller and more open economies of Thailand, Malaysia and Mongolia. These countries are not, of course, totally isolated – but the ratings agency believes they have sufficiently developed domestic demand characteristics to offset the worst of any eurozone contagion for the majority of corporates whose business is largely domestic or regionally focused.
The second way the eurozone crisis could affect Asian corporates is access to funding. However, most Asian corporates are in a stronger position now than there were going into the 2008 downturn, with substantially lower leverage. While aggregate forecast free cash flow for rated entities across all corporate sectors in 2012 is broadly zero, by far the largest contributor to this position is capex, which accounts for 80% of cash flow from operations. A large proportion of capex plans could be scaled back considerably if need.
The role of non-Asian investment in companies’ funding plans should also not be overstated. The majority of Asian companies remain financed by banks – typically by local or regional lenders.
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