Credit conditions tightening

ASIA-PACIFIC corporates are bracing for a longer stretch of volatility as conflict in the Middle East threatens to reshape costs, trade and investment decisions well into next year.

The region’s balance sheets may hold for now, but strategy is already shifting as executives prepare for a slower, more fragmented recovery.

The pressure points are becoming clearer as Fitch Ratings maps out how the Iran-linked conflict ripples through energy, supply chains and demand across the Asia Pacific.

“Many Asia-Pacific corporate sectors could be affected by the Middle East conflict through higher oil and gas prices, disruptions to shipping and supply chains, weaker demand and delayed recovery from cyclical troughs,” the agency says, underscoring the breadth of exposure.

The region’s vulnerability is structural.

“Many Asia-Pacific economies are large net energy importers and rely on sea trade routes vulnerable to disruption,” Fitch notes, pointing to the dual shock of rising fuel costs and logistical bottlenecks.

Even if hostilities ease, the after-effects could linger.

“The medium-term effect of the war is unclear, but it could have lagging consequences on the economy and corporates in the second half of financial year 2026 (2H26) even after it ends, as the energy market, global supply chains and consumer sentiment could take time to normalise,” Fitch argues.

That uncertainty is feeding directly into corporate strategy.

Companies are reassessing sourcing, inventory buffers and pricing power as tariffs and geopolitical tensions remain entrenched.

“Ongoing geopolitical tensions, sanctions and tariff uncertainty continue to affect supply chains, trade flows and pricing across multiple sectors,” Fitch says.

The result is a more defensive stance on margins and capital deployment, with a lingering impact on demand and margins in 2026 as companies restock at higher cost and operate under more adverse conditions.

New trajectory

Investment flows are already shifting within the region.

The so-called “China Plus One” strategy is accelerating, with production and supply chains moving towards Vietnam, Malaysia, India and Indonesia.

This reconfiguration comes with a price tag.

“Corporates face near-term capital expenditure (capex) and some inventory investment,” Fitch says, reflecting the upfront cost of diversifying manufacturing bases and securing alternative suppliers.

“At the same time, Chinese producers are not standing still.

“Chinese producers will continue to diversify their export markets, which may intensify competition in such markets, and reconfigure their production bases, including for autos.”

The divergence in growth across the Asia Pacific is becoming more pronounced, shaping credit trajectories.

In China, the operating environment remains tough.

“Weak domestic demand, persistent price competition and excess capacity are putting pressure on companies in the consumer, industrial, chemicals, building materials and automotive sectors,” Fitch notes.

Overcapacity is spilling beyond borders, with “more aggressive export competition, burdening producers across the region”.

By contrast, India and parts of South-East Asia are offering relative resilience.

Stronger domestic demand, infrastructure spending and healthier consumption trends are supporting sectors tied to local economies.

This split is influencing where capital is deployed, with investors and corporates tilting towards markets that offer clearer growth visibility and less exposure to global trade shocks.

Even so, China remains central to the regional outlook, and its property sector continues to cast a long shadow.

“Our sector outlook on China’s homebuilding sector remains ‘deteriorating’, but we expect the pace of sales decline to slow amid a supportive policy environment,” Fitch says.

The recovery, however, is uneven. “The market will remain heavily polarised by location and the profile of developers, with state-linked, large developers continuing to outperform the market,” Fitch highlights.

Policy easing may help stabilise core urban areas, but “suburban districts and lower-tier cities facing population outflows and industrial decline may remain under greater pressure”.

This backdrop feeds into a broader demand story.

China’s slower, property-constrained economy remains a headwind for demand in the region.

“We expect gross domestic product growth in mainland China to slow to just above 4% in 2026 from 5% as the economy contends with subdued domestic demand and deflationary pressures,” Fitch says.

Meanwhile, India and parts of South-East Asia are buoyed by domestic demand and industrial expansion.

Across Asia Pacific, it projects aggregate revenue growth to be around 2.6% in 2026, with the home-building sector a notable negative outlier.

The conflict adds another layer of uncertainty, as “demand development remains uncertain due to the conflict in the Middle East and could have broad repercussions on Asia-Pacific corporates, largely due to the spike in energy prices and softening consumer and corporate confidence”.

Margins and liquidity intact

Nevertheless, margins are holding up – for now.

“We expect earnings before interest, tax, depreciation and amortisation (Ebitda) margins to be resilient and increase above 15% on an aggregate basis, compared with 14% to 14.5% in 2023 to 2025,” Fitch says.

But the cushion is thin.

Main risks to this projection include higher energy costs and commodity prices, which could remain above the pre-conflict level well into 2H26, according to Fitch.

It points out that companies are stepping up efficiency drives, yet several sectors could accelerate savings initiatives in the face of soaring input costs but it may not be enough to fully offset weakening consumer demand in the region.

Cash-flow dynamics reflect the same tension between resilience and strain.

“Strengthening Ebitda margins combined with moderating capex in some sectors should lead to improvement in aggregate free cash-flow (FCF) generation in 2026, although FCF margin will remain negative at around minus 1.5%, from minus 2% in 2025,” Fitch says.

The energy transition remains a key drain, particularly for utilities, where FCF margin is around minus 8%, due mainly to the massive investment required by the energy transition.

“The telecommucations sector also requires significant capex for 5G deployment but it is covered by solid profitability,” Fitch observes.

“We expect capex to ease slowly for autos, technology transformations and production footprint development.”

On energy transition, the process appears to be slowing amid stronger government support for hydrocarbon-based energy in some countries.

However, the Iran conflict could paradoxically spur alternative investment.

“The Iran conflict may lead to further investment in renewable energy, in addition to reducing cuts to coal- and nuclear-fuelled power generation,” says Fitch.

Despite the headwinds, refinancing risks remain contained.

“A benign local monetary policy supporting lower rates, and generally liquid domestic funding conditions, should support Asia-Pacific corporates’ refinancing and liquidity needs even if access to offshore debt markets turns unfavourable,” Fitch says.

However, “net foreign-currency bond issuance could remain negative in 2H26”.