S&P: Delta, defaults and China reset rattle AsiaPac credit conditions

KUALA LUMPUR: The resurgence of Covid-19 outbreaks, the likely China Evergrande Group default, and a recent shift in China socioeconomic policy have created uncertainty in the credit outlook of Asia-Pacific issuers, S&P Global Ratings said.

It said on Tuesday among many challenges, a slowing regional economic recovery may delay the resolution of bad debt of corporates and households.

The Covid-induced lockdowns could also compound supply chain challenges, boosting inflation.

S&P Global Ratings said these and other conclusions were highlighted in its two reports titled, "Credit Conditions Asia-Pacific 4Q 2021: Covid besets, China resets," and, "Sector roundup Asia-Pacific 4Q 2021: Improved rating trend likely to wane."

S&P Global Ratings credit analyst Eunice Tan said: "China's recent enforcement of socioeconomic policies to promote 'common prosperity' in the country has increased uncertainty about the credit and growth trajectories of the nation, and individual borrowers. This could imply lower GDP growth with spillover effects regionally and globally.”

Tan said Evergrande's likely default is rattling the region's credit markets. Evergrande is the largest speculative-grade issuer of offshore dollar bonds in Asia-Pacific.

Evergrande's difficulties may also hurt the suppliers and contractors that back China's property sector, and the banks and financial institutions that lend to them.

Events have shaken investors' confidence in China's developers and for speculative-grade markets broadly, Tan said.

S&P Global Ratings lowered its Asia-Pacific economic growth forecast to 6.7% in 2021 from 7.1%.

Persistent Covid waves, mostly driven by the delta variant--have delayed the normalisation of domestic activities and tourism, hitting private consumption and services.

The spread of the delta variant continues to push up infection cases, prompting a rethink of Covid-containment strategies.

Two dominant camps have arisen: "zero-Covid cases" or "living with COVID".

Countries such as China, Hong Kong, New Zealand, and Australia continue to focus on outbreak suppression.

However, Thailand, Singapore, and Malaysia are moving toward living with Covid. Those nations that adopt a zero-Covid stance will have to bear economic and credit costs.

S&P Global Ratings pointed out The Chinese government's crackdown on education services, the technology sector and gaming is consistent with its emphasis on "common prosperity".

The term, originated by Mao Zedong, seeks to achieve a fairer and more even distribution of wealth in the country. This may underline a tolerance for lower private sector income and GDP growth, in its view.

S&P Global Ratings credit analyst Terry Chan said: "The US-China strategic relationship remains strained. Increasingly hawkish stances by either party could escalate tensions quickly. This may disrupt cross-border trade, hitting regional economies.

“The ratings of a net negative 7% of Asia-Pacific issuers are on negative outlook or CreditWatch with negative implications, an improvement from negative 11% at mid-year.

“We expect momentum to wane, however, given the recent setbacks in the region's economic recovery, including renewed lockdowns and other restrictions to combat resurging Covid-19 cases,” Chan added.

Sectors with the heaviest negative outlooks include retail, autos, airlines, autos, and hotels, gaming, and leisure.

By its estimates, these sectors may not return to pre-Covid credit metrics before 2022 or 2023. Sectors with stronger outlooks include technology, in part due to rising orders related to work-from-home arrangements.

That said, Covid disruptions, while beneficial to pricing for chips and other short-supply components, have also added to strains for producers.

S&P Global Ratings pointed out banks have a stable outlook, in part because we believe governments would support the sectors in the event of distress.

However, credit losses for the sector will continue to climb, reaching US$563bil by end-2022.

Public spending across the region remains elevated to keep infection waves at bay while sustaining an economic recovery.

Meanwhile in China, local and regional governments are likely to benefit from additional credit buffers in expectation of tightening control over public finances and higher demand for local fiscal discipline.

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