Moody’s: Stable Outlook for South, Southeast Asian Corporates

The overall credit quality of corporates and financial institutions in South and Southeast Asia will be stable over the next 12 months, according to a new report from Moody’s Investors Service.

“We believe the region can withstand the increased headwinds that are likely this year, including slower economic growth in China, the spillover effects of the US Federal Reserve scaling back on its bond-buying program, tighter global liquidity conditions and greater exchange rate volatility,” said Michael Taylor, Moody’s managing director and chief credit officer for Asia Pacific.

The stable outlook for corporates in South and Southeast Asia reflects the rating agency’s expectation of a stable credit environment in 2014, solid liquidity for most corporates rated by Moody’s and stabilising leverage. Three quarters of all Asian corporates rated by Moody’s carry stable rating outlooks.

In addition, Asia Pacific bond maturities in both domestic and cross-border markets in 2014 ($108 billion) are lower than the region’s average yearly bond issuance in each of the last three years. Moreover, the vast majority (93%) of maturities are investment-grade, with speculative-grade maturities totalling just $8 billion this year.

“In the case of Singapore, real estate investment trusts should exhibit stable occupancy and rental rates, supported by a manageable pipeline of new supply across most segments, and proactive lease management to pre-commit rentals in advance of expiry,” said Philipp Lotter, a managing director for Moody’s Corporate Finance Group.

For neighbouring Indonesia, Moody’s overall stable outlook for nonfinancial corporates is driven by Moody’s expectation that modest domestic growth will be supportive of key sectors such as telecoms, media and property, and general consumer spending.

Against this, Moody’s expects fuel tax hikes passed in June 2013 to dampen domestic consumption, while elections later this year will bring temporary policy uncertainty.

“While we expect companies in the oil, gas and petrochemical sectors to continue investing heavily in growth and diversification, against the backdrop of a widening gap between Indonesia’s crude oil output and consumption, political and regulatory uncertainties continue to cloud our stable outlook for these sectors,” Lotter said.

He added that the outlook for Indian nonfinancial corporates is negative, reflecting macroeconomic challenges over the next 12 months. “We expect India’s GDP growth to remain weak, at 5.5% in the fiscal year ending March 2015, as elections—due by May—will delay reforms needed to revive the economy,” Lotter said. “In addition, the rupee will remain volatile, making the operating environment more challenging for importers and exporters. Companies will also face higher borrowing costs and tight funding conditions, with monetary policy likely to remain tight.”

In terms of specific sectors in India, Moody’s maintains a stable outlook for exploration and production companies, IT and business process outsourcing firms and telecommunications companies. On the other hand, the outlook is negative for the refining and marketing sector, as well as for the steel, metal and mining industries and the automotive sector.

As for the banking industry, Moody’s says the credit profiles and ratings of banks in Asia continue to compare well against banks in other regions.

“Most banking systems in Asia are well capitalised and exhibit strong profitability buffers. Moreover, their assets are largely funded by domestic deposits, a situation which adds resilience to their liquidity profile,” said Stephen Long, Moody’s managing director for the financial institutions group in Asia Pacific. “We expect these strengths to persist in 2014, allowing most systems to remain resilient in our base case scenario, which is characterised by the gradual recovery in global growth.”

However, Moody’s assessment is that credit quality in Asia has generally peaked, and that some systems will face increasing asset quality challenges. The downside risks primarily stem from recent rapid credit creation and elevated asset prices.

In terms of individual banking systems, the outlook for banks in India, Vietnam and Singapore is negative, while that for Philippine banks is positive. All the other banking systems in South and Southeast Asia have stable outlooks.

“The negative outlook for the Indian banking system pertains mainly to public-sector banks, as such banks represent more than 70% of total system assets. These banks will remain dependent on government injections to maintain their capitalisation levels,” said Long.

As for Vietnam’s banking system, Moody’s negative outlook reflects the difficult operating environment—characterised by domestic macroeconomic imbalances—which poses risks to the banks’ asset quality.

On Singapore, Moody’s says the negative outlook for the banking system is owing to rapid loan growth and rising real estate prices. Both factors have increased the probability of deterioration in credit quality.

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