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THE Singapore and Hong Kong markets are most bearish on the credit quality of commodities and energy companies, credit rating agency Moody's said in a report on Monday.
It had asked market participants which sectors - among commodities, energy, real estate, financial institutions, infrastructure and utilities, automotives, retail, and telecommunications, media and technology - will be most exposed to downside risks in 2016.
Of the participants who responded, 88 per cent and 65 per cent of audiences in Singapore and Hong Kong respectively, were most worried about the commodities and energy sectors in terms of credit quality in 2016.
The polling result was consistent with Moody's view that rated Asian corporates with commodity exposure remain in a precarious position. Specifically, Moody's holds negative outlooks for Asia's coal and steel sectors.
On Jan 22, 2016, Moody's placed the ratings of 120 oil and gas companies and 55 mining companies globally on review for downgrade, reflecting a mix of declining prices, weakening demand and a prolonged period of oversupply.
In addition, the Moody's report also included polling results taken from Moody's annual Asia Pacific Outlook Briefings in Singapore and Hong Kong in January 2016.
The events brought together the largest investors, intermediaries and debt issuers across both regional hubs, with more than 300 people attending.
Of the market participants polled during the events, a significant majority in Singapore (58 per cent of respondents) and Hong Kong (53 per cent) agreed with Moody's that a sharper-than-expected slowdown in the Chinese economy represents the greatest risk to Asia's growth prospects in 2016.
Rahul Ghosh, a Moody's vice president and senior research analyst, expects the flat or slower growth in most Asian economies' credit and capital flow volatility to weigh on the region's rated debt issuers, particularly in the corporate sector in 2016.
"Foreign exchange exposures are partly mitigated by the prevalence of domestic financing for sovereigns and banks and natural or financial hedges for rated corporates. However, weak growth and commodity price declines will interact with foreign currency volatility to raise credit risk across the region."
On Moody's-rated non-financial corporates in particular, the report said that corporate credit quality will decline in 2016 as it did in 2015, leading to further rating pressure and defaults, especially for Moody's-rated speculative-grade companies.
However, accommodative monetary policy, solid funding conditions in local bond markets and banking systems, and manageable refinancing needs should prevent defaults from spiking materially.
As for Asian banks, while their asset quality and profitability will deteriorate, the banks demonstrate rating cushions. Problem loans will continue to rise in most banking systems, as slower growth exposes corporate and household leverage concerns.
On Asian sovereigns, Moody's says that the sovereigns' growth prospects, policy flexibility and limited external vulnerabilities underpin Moody's generally stable ratings outlooks for them.
However, the credit buffers that the sovereigns have built will be tested in a more adverse macroeconomic environment, as volatility in capital flows affects balance of payments positions, and also as governments use a combination of monetary and fiscal measures in response to both slower domestic growth and external shocks.