The primary driver of increased risk in Asia-Pacific credit conditions is the uncertainty caused by the new US administration's protectionist trade position (‘America First’), according to S&P Global Ratings. Other ongoing risks are China's debt overhang, potentially higher interest expenses, and volatile foreign exchange rates.
Risk #1: Adverse US trade policies
The new US administration is leaning toward adopting protectionist trade policies as part of its wider economic and tax agenda. More particularly, the US president's proposal for additional import tariffs and plans from Republicans in the US House of Representatives for a Border-Adjustable Tax (BAT) regime would weigh on trade and exports in the Asia-Pacific region.
Among major Asia-Pacific economies, China, Korea, and Taiwan may be the economies that are most sensitive to such policies. These countries' net exports-to-GDP ratios (that is, net exporter's national GDP) would be most affected should the US impose tariffs or border taxes against exporting countries.
While Singapore and Hong Kong are net importers from the U.S., their economies are also likely to be affected, given their transport-hub roles and reliance on import-export trade flow. The impact could be particularly acute should the regional trading partners of the US retaliate with counter-tariffs that would curb the flow of US imports.
Risk #2: China debt overhang remains an elevated concern
A disorderly deleveraging of China's outsized and growing debt burden (particularly corporate), as China's economy rebalances away from being overly investment dependent, would undermine market confidence, loan performance, and asset and commodity prices. Such a scenario would increase volatility and liquidity stresses in financial markets, particularly those in emerging markets.
The ever-increasing level of corporate debt in China is intensifying risks because of weakening borrower credit quality. The still-high growth rate of debt could lead to potential losses over the next year or two; however, we believe China's banks have sufficient financial strength to absorb the potential losses that could arise.
Risk #3: Higher interest costs and volatile foreign exchange
Soon after the US presidential election in November 2016, the global financial markets had pushed up bond yields and sold down emerging market currencies. The markets appear to assume that the new administration would boost infrastructure spending and cut taxes, increasing inflation and leading to higher US dollar interest rates. However, the financial markets have since settled down, with bond yields tightening and emerging market currencies recovering
We assess that the relative exposures of borrowers in Asia-Pacific to interest rate movements and the US dollar have decreased over the last year or so, with refinancing occurring in domestic currency markets. For example, Chinese state-owned enterprises (SOEs) and property developers have refinanced some of their domestic debt. However, the risk of capital outflows due to investors seeking higher yields and favoring the US dollar (rather than emerging market currencies) remains as investors await the implementation of the new US administration's proposals.
Risk #4: Property market adjustment
After some cooling off in early to middle 2016, it appears that property prices in some key Asia-Pacific markets such as Australia, China, and Hong Kong are surging again. This indicates that the impact of various administrative measures taken by the authorities in 2016 to ease property pressure has largely passed. Consequently, some risk for further adjustments still exists. We continue to highlight frothy property prices in some Asia-Pacific markets – including Hong Kong and Australia – as a key risk to the ratings of banks.
Risk #5: Corporate refinancing challenge
China has a relatively high degree of bonds maturing in 2017, which poses some refinancing risk. That said, the bulk of China's bonds are domestically sourced, mitigating some of the risk for the country.
Also, financing conditions are showing less signs of stress after the global bond sell-off in the weeks following the US presidential election in November 2016 and have recently stabilised, although a liquidity squeeze occurred for China's smaller financial institutions in mid-March 2017. While still volatile, government bond yields have largely moved within the range occurring in mid-November to mid-December 2016.
We expect US$994 billion of rated Asia-Pacific financial and non-financial corporate debt to mature from 2017 through 2021 about 10.3% of the US$9.6 trillion maturing globally. Financial companies account for 58% (US$579 billion) of Asia-Pacific's maturing corporate debt, and 90% (US$895 billion) of the debt is rated investment grade ('BBB-' and higher), which should help temper the region's overall refinancing risk.
Issuer Ratings Are Still Negative, But Conditions Are Firming Up
The net negative ratings outlook bias of the pool of Asia-Pacific issuers that we rate improved marginally to -14% in February 2017 from -15% in October 2016. The negative bias reflects our view that Asia-Pacific issuers have yet to shake off the effect of the region's recent economic slowdown despite expectations of growth stabilizing this year. The average rating of the Asia-Pacific pool remains 'BBB+'.
Among the major sectors, metals and mining has the highest negative bias at -42%; followed by oil and gas, -28%; real estate development, -25%; capital goods, -24%; financial institutions, -22%; and transportation cyclical, -21%.
On the macroeconomic front, the baseline has improved somewhat, but risks have widened and become skewed to the downside. We recognize that intra-regional political risk (for example, South China Sea territorial disputes) is a concern with a few intergovernmental disagreements spilling into the commercial arena (for example, between the governments of China and South Korea).
The article is authored by Terry Chan, Managing Director, at S&P Global Ratings
