SINGAPORE: Moody's Investors Service says the credit quality of palm oil producers across Asia is weakening as oversupply is muting crude palm oil (CPO) prices and hampering deleveraging efforts.
Moody's analysis is contained in its latest edition of Inside ASEAN by Alan Greene, a Moody's vice-president, senior credit officer and a lead analyst on Asian palm oil producers.
Greene noted that the average CPO prices fell more than 30% to RM2,191 a tonne in the second quarter of 2015 from the corresponding period in 2012, and averaged RM2,067 a tonne in July/August.
"We expect CPO prices to remain under pressure over the next 18 months, with vegetable oil markets oversupplied and demand soft," he said.
Lower prices have muted cash generation, reflected in the recent negative rating actions on three palm oil companies: Golden Agri-Resources Ltd (Ba3 negative), Sime Darby Bhd
(A3 negative) and IOI Corporation Bhd (Baa2 negative), notes the rating agency.
Inside ASEAN also examines the impact of the recent currency depreciation of the ringgit and rupiah.
Moody's noted that the ringgit depreciation is a symptom of declining export revenues, capital outflows and worsening sentiment towards Malaysia.
It said these are negatively impacting key credit buffers such as the country's current account surplus, foreign reserve coverage and economic growth trajectory.
However, the rating agency expects the direct impact of the ringgit depreciation to be manageable for the Malaysian sovereign due to the low proportion of government debt denominated in foreign currencies.
Moody's said the rupiah's recent 17-year low is credit negative for property developers in Indonesia because two-thirds of their debt is denominated in US dollars but their earnings are entirely in rupiah.
It said Malaysia and Indonesia will remain affected by the continued broad weakness in commodities prices as they are net exporters of both oil and metals.
Around 30% of Malaysian government revenue and over 20% of exports are derived from oil and gas.
Additionally, net metals exporter Indonesia will face further muted demand and revenues, notes the rating agency.
Furthermore, slowing momentum in China has led Moody's to lower forecasts for the country's real gross domestic product (GDP) growth to 6.8% this year from 7.4% in 2014. Moody's expects growth in 2016 to weaken further to 6.3%, versus its earlier projection of 6.5%.
The resultant softer demand from China, the world's second-largest economy, combined with still lacklustre conditions in Europe and Japan, will weigh on exports from and output in Asea, said Moody's.
Specifically, it said fiscal underspending in the Philippines, and weaker exports despite increased fiscal spending for Thailand continue to drag on GDP growth in both countries.
It said weaker trade and financial flows have also resulted in a lower GDP forecast for Singapore. - Bernama
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