Asia-Pacific rating bias slides into negative zone, says S&P

  • Markets
  • Monday, 3 Dec 2018

MELBOURNE: The overall rating trend for  Asia-Pacific has in recent months turned slightly negative going into 2019 due to tighter financing conditions and geopolitical tensions,  according to S&P Global Ratings.

"This time last year, the ratings momentum was more positive. Over the past five months ended Oct. 31, 2018, however, the trend has turned negative for the region," said S&P Global Ratings credit analyst Terry Chan on Monday. 

"Although economic activity remains firm, market sentiment has soured. Financing conditions compared with a year ago are tighter."

His comments were contained in a publication titled, "Asia-Pacific Credit Outlook 2019".

As for sovereigns, geopolitical tensions, increasingly protectionist trade policies, and more recently, the emerging market rout, pose tail risks. 

However, S&P pointed out the still-steady economic conditions in major developed economies and growing domestic demand will support sovereign ratings in the region. 

“In public finance, the Chinese authorities' slight softening of its policy tone is stabilising infrastructure investment and the local regional government sector's reasonable credit growth,” he said.

S&P  said that Asia-Pacific's corporate sectors are likely to face tighter borrowing conditions in 2019. 

Meanwhile, the credit cycles for financial institutions in many Asia-Pacific jurisdictions (except for India – where non-performing loans are high) are at their peaks. Insurers continue to face a largely stable operating environment.

While the US-China trade dispute and China's slowing economy have dampened business and consumer sentiment, Asia-Pacific's capital expenditure and consumption levels are still likely to grow, albeit at a slower rate than previous quarters. 

Indeed, economic growth and infrastructure investment underpin the stable credit trend for the building materials sector. 

A downside risk is that sales and price growth in China's real estate development sector (Asia-Pacific's largest market) could have peaked, implying a tougher environment. 

Meanwhile, Asia-Pacific REITs' prudent financial stance has provided a buffer for the ratings to withstand debt-funded growth and economic shocks. 

Stable employment prospects in all major securitisation markets will keep structured finance arrears and defaults low, although softening property prices in Australia add to borrower refinancing pressures.

Consumption growth and steady employment will bolster some industries. 

China's rising middle classes would further lift consumption -- albeit a little slower – supporting the stable credit trend of consumer product companies. 

However, mounting competition and higher input costs could squeeze the margins of consumer product companies. 

Likewise, margin pressures continue to challenge retail players because of consumers' shifting preference toward price discounts and online products. 

In gaming, the better profit margins of the mass-market segment would still support profit growth, despite slower Macau revenue growth mainly due to the VIP segment.

Slowing demand growth, coupled with capacity expansion in display and semiconductors, pose a risk to the profitability and cash flows of information technology and consumer electronic companies. 

Competition is intensifying in several countries for telecommunications operators, albeit their credit 
quality is stable. 

The region's existing infrastructure deficit will support demand for transportation infrastructure, although trade dispute headwinds pose a risk for transportation cyclical companies.

Likewise, favorable commodity prices (input costs) and the capital expenditure needs of the auto manufacturing and construction sectors drive the capital goods industry's stable credit quality. 

Nevertheless, automakers face stiff competition and slowing sales. 

In the chemicals sector, weaker demand amid rising input costs and global capacity expansion, could lower petrochemical spreads over the mid to long term.

On the other hand, the metals and mining industry continues to reap good earnings due to still-attractive metal prices despite volatility in commodity markets. 

“The credit metrics of oil and gas companies are likely to improve in 2019, based on our oil price assumptions and corporates controlling their spending. 

“For utilities, stable energy demand supports players, although higher fuel costs, particularly coal and oil, remain a risk,” S&P said.

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