The coronavirus outbreak adds to other pressures on growth in Asia Pacific - Photo by DHL

JAKARTA (TheInsiderStories) – Rating agency Moody’s Investors Service’s outlook for the banking industry in the Asia Pacific (APAC) is negative over the next 12 months because the United States (US) – China trade dispute will weaken economic and trade activity in the region, and erode investor confidence.

“Weaker economic and trade conditions will lead to moderate increases in problem loans for APAC banks,” says Eugene Tarzimanov, a Moody’s Vice President and Senior Credit Officer, in a written statement today (12/09).

“Meanwhile, the banks’ profitability will fall, because they are raising credit provisions while central banks are cutting interest rates to support economic growth,” adds Tarzimanov.

Nevertheless, Moody’s says that APAC banks have generally maintained good capital and liquidity buffers and the probability of government support for these banks will stay high, except for the banks in Hong Kong, because the territory is the only jurisdiction in APAC with an operational resolution regime.

Moody’s conclusions are contained in its just-published 2020 outlook for the 17 banking systems in the APAC, namely, Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Mongolia, New Zealand, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam.

Moody’s points out that while high private-sector leverage poses a risk to many APAC economies, the buildup in leverage is generally moderating.

Most APAC banking systems have passed Moody’s stress test on capital, except for the banks in India, Mongolia, Sri Lanka and Vietnam, because banks in these jurisdictions have lower starting capital ratios and higher starting problem loan ratios.

Moody’s report also says that environmental, social and governance risks will increasingly affect the creditworthiness of APAC banks.

Last month, Moody’s also cut its global sovereign outlook for 2020 to ‘negative’ from ‘stable’, saying disruptive and unpredictable world politics would slow growth and increase the risk of economic or financial shocks.

Overall, the global environment is becoming less predictable for the 142 sovereigns Moody’s rates, encompassing US$63.2 trillion in debt outstanding.

“The starkest manifestation of geopolitical tensions in the US-China trade war. Notwithstanding the latest pause, broader disruption to trade is aggravating long-standing structural bottlenecks and damaging the outlook for growth,” says Alastair Wilson, Managing Director of Moody’s Sovereign Risk Group.

The antagonistic political environment is also weakening the shock-absorption capacity of sovereigns with high debt levels and low fiscal buffers. For some, it is also weighing on institutional strength, with policymakers increasingly constrained, added Jaime Reusche, Moody’s Vice President and co-author of the report.

While the starkest example remains the US-China trade spat, tensions that diminish growth have also risen in the Gulf, between Japan and Korea, India and Pakistan, the US and the Europa, and the Europa and Britain.

The first-order effect of these strains – for example, the impact of tariff increases on trade volumes – is not always severe, but the knock-on impact on investment and capital flows is likely to damage both near- and medium-term growth prospects across all regions.

Across the G-20, Moody’s estimates that growth has fallen to 2.6 percent in 2019 from 3 percent in 2018. While recovery from weak or negative growth in a number of emerging markets may sustain that level overall in 2020, global growth will remain below potential.

The slowdown partly reflects cyclical factors and structural drivers including demographic trends. However, the impact of the increasingly antagonistic global political environment has been pervasive, particularly on global trade and investment, the report said.

Unpredictable politics create an unpredictable economic and financial environment, prone to volatility in financial and commodities markets and sharp shifts in sentiment. The two largest trading economies, the US and China, are slowing down and, beyond the latest apparent thawing in their relationship, seemingly locked in an unwinnable trade war, with repercussions for other countries.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com