Credit trend for Apac corporates stable but risks remain

CREDIT trend for non-financial companies in the Asia-Pacific (Apac) region will remain stable for the rest of the year, although risks are rising, said Moody’s Investors Service.

As of the end of the third quarter, 82 per cent of Moody’s Apac corporate portfolio had a stable ratings outlook. The share of ratings with either a negative outlook or a review for downgrade stood at 15 per cent. About half of these ratings with negative implications were Chinese property developers.

“Although the Chinese government has introduced measures to stabilise the property market, the tight funding environment, concerns about slowing economic growth and the risk of project incompletion weighed on property sales,” Moody’s said in its report.

Negative rating actions outpaced positive ones in Q3, with 34 negative actions compared with 8 positive ones.

The positive rating actions were mainly on metals and mining companies, driven by improving credit quality amid strong earnings. Gaming and property remained the most pressured sectors, with 100 per cent and 56 per cent of the ratings in the portfolio having negative implications, respectively.

The ratings agency in August further lowered its 2022 gross domestic product (GDP) growth forecast for G20 advanced and G20 emerging economies to 2.1 per cent and 3.3 per cent, respectively. Its GDP growth forecast for the US is 1.9 per cent, and 3.5 per cent for China.

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In a separate report, Moody’s said it still expects China to experience a “modest growth recovery” in 2023 in its base-case scenario.

“However, risks are rising that the slowdown in China’s growth might be structural rather than cyclical. In this situation, there would be spillovers to the rest of the region and to other economies through a variety of channels,” said Deborah Tan, Moody’s assistant vice-president and analyst.

In addition to north-east Asian economies which have direct exposure to China demand for a range of manufactured goods, commodity-producing countries such as Australia, Mongolia, and to some extent Indonesia were highlighted as being more vulnerable.

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Meanwhile, a sustained slowdown in China could result in some companies speeding up their diversification strategies. But this would not offset the potential spillover effects of a prolonged slowdown, added Moody’s.

Slower growth would also depress confidence and investment in the region, particularly for frontier markets. China might have to pull back further on strategic investments in the Belt and Road Initiative (BRI), affecting mostly lower-income Asian economies and exacerbating their social risks.

Indeed, since 2020, China has cut investments across nine emerging and frontier countries in Asia, noted Tan in the report. BRI investment in these Asian economies totalled US$12.7 billion per year on average before the pandemic, but the investments have fallen since then, she said.