Credit quality of Asian palm oil players weakens, says Moody’s

PETALING JAYA: The credit quality of Asian palm oil producers is weakening, as oversupply is muting crude palm oil (CPO) prices and hampering deleveraging efforts, said Moody’s Investors Service.

The average CPO price fell more than 30% to RM2,191 per tonne in the second quarter of this year from the second quarter of 2012 and averaged RM2,067 per tonne in July-August.

“We expect CPO prices to remain under pressure over the next 18 months, with vegetable oil markets oversupplied and soft demand,” said Alan Greene, Moody’s vice-president, senior credit officer and a lead analyst on Asian palm oil producers.

He said in Moody’s latest edition of Inside ASEAN that lower prices had muted cash generation, reflected in the recent negative rating actions on palm oil companies Golden Agri-Resources Ltd (Ba3 negative), Sime Darby Bhd (A3 negative) and IOI Corp Bhd (Baa2 negative).

Inside ASEAN also examined the impact of the recent currency depreciation of the Malaysian (A3 positive) ringgit and Indonesian (Baa3 stable) rupiah.

The ringgit depreciation was a symptom of declining export revenues, capital outflows and worsening sentiment towards Malaysia.

“These are negatively impacting key credit buffers such as the country’s current account surplus, foreign reserve coverage and economic growth trajectory,” added Moody’s.

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 Indonesian 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.

“Malaysia and Indonesia will remain affected by the continued broad weakness in commodity prices, as they are net exporters of both oil and metals.”

Around 30% of Malaysia’s government revenue and over 20% of exports are derived from oil and gas.

Furthermore, the slowing momentum in China (Aa3 stable) has led Moody’s to lower forecasts for China’s real gross domestic product growth to 6.8% this year from 7.4% in 2014.

In 2016, Moody’s expects growth will weaken further to 6.3%, versus its earlier projection of 6.5%.

The resultant softer demand from China, which remains the world’s second largest economy, combined with still lacklustre conditions in Europe and Japan (A1 stable), would weigh on exports from and output in Asean, said Moody’s.