State-owned companies' debt threatens emerging economies: Moody's

A Garuda Indonesia aeroplane taking off at Soekarno-Hatta airport in Jakarta. Credit agency Moody's has flagged high debt-to-equity ratios at listed state-owned enterprises in the Asia-Pacific, such as Indonesian carrier Garuda.
SEPTEMBER 12, 2019 - 6:33 PM

THE risk of bailing out state-owned enterprises (SOEs) could put pressure on national balance sheets in emerging and “frontier” markets in South-east Asia, Moody’s Investors Service has warned in a report.

The threat comes mainly from so-called implicit liabilities, where governments are not contractually on the hook for debt but could still be pushed to step in - for example, with debt defaults by state-linked entities.

Within Asean, unlisted SOEs in Vietnam pose the highest risk, while some state-owned companies in Indonesia, Malaysia and Thailand also “show weak financials”, the report said.

The analysts flagged outstanding debt levels at unlisted SOEs such as Electricity of Vietnam and Cambodia’s Electricite du Cambodge, and high debt-to-equity at listed SOEs such as Indonesian construction company Waskita Karya and carrier Garuda, Malaysian property group Encorp, and Thai Airways.

Based on leverage weakness for the listed entities, “we find that the costs of crystallisation at any of these SOEs in isolation would be small but non-negligible for weak SOEs in Taiwan, Thailand, India, Indonesia, Korea and, to some extent, Malaysia”, the credit analysts said.

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SOEs in the public utilities sector and in infrastructure industries like airlines, construction and heavy engineering generally face the most debt and financial stress, Moody’s added, while assessing management of implicit liabilities to be weakest in markets such as Indonesia and Thailand, as well as in frontier economies.

But direct liabilities from SOEs are another danger to countries’ balance sheets too.

Senior analyst Anushka Shah noted that explicit liabilities “are primarily driven by government guarantees and have risen” in markets like Malaysia. There, government-guaranteed debt makes up almost 19 per cent of gross domestic product - nearly five times the average for the Asia-Pacific, excluding China.

Meanwhile, liabilities associated with public-private partnerships (PPPs) are rising in the region, but “only a small number of countries reveal their possible risks from PPPs (including Malaysia, Indonesia, the Philippines and Japan)”, the report remarked. “And some governments might not adhere to global accounting standards for PPP disclosure.”