Moody’s Investors Service says that Asia’s credit markets face a challenging year in 2016, because of heightened market concerns over China’s (Aa3 stable) growth slowdown and the pace of interest rate normalization in the US (Aaa stable). “It is becoming evident that the Chinese government’s primary objectives of maintaining growth in excess of 6.5%, implementing reform and economic rebalancing, and ensuring macroeconomic and financial stability cannot be achieved in unison,” says Michael Taylor, a Moody’s Managing Director and Chief Credit Officer for Asia Pacific. “China’s policy trilemma is creating uncertainty for regional credit,” adds Taylor. Taylor says that recent stimulus measures in China and market intervention suggest that growth and stability in the country will be prioritized, at the likely expense of a slower pace of reform and delays to system deleveraging. “As for Asia credit overall, the flat or slower growth for most Asian economies in 2016 and capital flow volatility will weigh on the region’s rated debt issuers, particularly in the corporate sector,” says Rahul Ghosh, a Moody’s Vice President and Senior Research Analyst. “Foreign exchange exposures are partly mitigated by the prevalence of domestic financing for sovereigns and banks and natural or financial hedges for rated corporates,” adds Ghosh. “However, weak growth and commodity price declines will interact with foreign currency volatility to raise credit risk across the region”. Taylor and Ghosh were speaking on Moody’s just-released report titled “Asia Credit – Regional Fundamentals Put to the Test: FAQ on Asia Credit in 2016”. On Moody’s-rated non-financial corporates in particular, the report says that corporate credit quality will decline in 2016 as it did in 2015, leading to further rating pressure and defaults, especially for Moody’s-rated speculative-grade companies. However, accommodative monetary policy, solid funding conditions in local bond markets and banking systems, and manageable refinancing needs should prevent defaults from spiking materially. Moody’s points out that the Asian high-yield default rate in 2016, for instance, will not return to the 14% peak seen in 2009. As for Asian banks, while their asset quality and profitability will deteriorate, the banks demonstrate rating cushions. Problem loans will continue to rise in most banking systems, as slower growth exposes corporate and household leverage concerns. Specifically, Moody’s holds negative banking system outlooks in China, Hong Kong (Aa1 stable) and Mongolia (B2 negative). Nonetheless, strong capital buffers, healthy funding conditions and government support will cushion the banks’ final ratings. On Asian sovereigns, Moody’s says that while the sovereigns’ growth prospects, policy flexibility and limited external vulnerabilities underpin Moody’s generally stable ratings outlooks for them, the credit buffers that the sovereigns have built will be tested in a more adverse macroeconomic environment. In particular, the sovereigns’ external health will be tested as volatility in capital flows weighs on balance of payments positions, while policy space will be eroded as governments use a combination of monetary and fiscal measures in response to both slower domestic growth and external shocks. Moody’s report includes polling results taken from Moody’s annual Asia Pacific Outlook Briefings in Singapore and Hong Kong in January 2016. The events brought together the largest investors, intermediaries and debt issuers across both regional hubs, with more than 300 people attending. Of the market participants polled during the events, a significant majority in Singapore (58% of respondents) and Hong Kong (53%) agreed with Moody’s that a sharper-than-expected slowdown in the Chinese economy represents the greatest risk to Asia’s growth prospects in 2016. Market participants were also asked which sectors – among commodities, energy, real estate, financial institutions, infrastructure and utilities, automotives, retail, and telecommunications, media and technology – will be most exposed to downside risks in 2016. Of the participants who responded, 88% and 65% of audiences in Singapore and Hong Kong respectively, were most worried about the commodities and energy sectors in terms of credit quality in 2016. The polling result was consistent with Moody’s view that rated Asian corporates with commodity exposure remain in a precarious position. Specifically, Moody’s holds negative outlooks for Asia’s coal and steel sectors. On 22 January 2016, Moody’s placed the ratings of 120 oil and gas companies and 55 mining companies globally on review for downgrade, reflecting a mix of declining prices, weakening demand and a prolonged period of oversupply.
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