JAKARTA (TheInsiderStories) – High proportion (67 percent) of rated project and infrastructure companies in Asia Pacific continue to have low exposure to the coronavirus-related disruptions, supported by their essential nature and predictable cashflows. Our conclusions are contained in an update to its heat map for the sector.
The number of companies with high exposure has reduced in recent months, particularly the Chinese toll road sector following the end of the toll-free period and with recovering traffic volumes. Airports now make up most of the high exposure category.
Whereas Moody’s in April estimated 9 percent of project and infrastructure companies had high exposure to coronavirus disruptions, this number has now declined to 5 percent. On the other hand, a small number of power utilities now have moderate exposure to coronavirus disruption, given rising pressure from falling power prices and lower demand, which is only partly offset by lower fuel costs.
Following the reclassification of these toll roads and utilities, the number of companies with moderate exposure has increased to 28 percent from 23 percent in April. Moreover, a limited number of projects with exposure to commodity risk – particularly energy-related – also face rising challenges following the recent material fall in oil, gas and coal prices.
Still, the majority – 67 percent – of companies face low exposure, and include regulated utilities, projects and public-private partnerships. This risk exposure for regulated networks remains low notwithstanding temporary tariff relief measures instituted by certain companies, given their temporary nature and immaterial effect on metrics.
While, Indonesian banks will see their asset quality and profitability deteriorate on coronavirus impact, but their capital and liquidity will remain strong, providing ample buffers to absorb the financial stress. Restructured loans in Indonesia have grown significantly since authorities relaxed rules for debt restructuring in March 2020 to provide financial relief for those impacted by the crisis.
And while this, along with subsidies for consumers and small businesses will provide temporary relief for banks, nonperforming loans will still increase substantially in the longer term, given the scope of economic disruptions stemming from the coronavirus crisis.
Banks’ profitability will also deteriorate materially because of increasing credit costs, as they continue to proactively identify weak borrowers and increase provisions for them. Then, interest margins will contract because of low interest rates and slowing loan growth, further pressuring profitability.
Despite the challenges ahead, banks’ capitalization and liquidity will remain strong. A slowdown in capital consumption due to slowing loan growth coupled with rising loan-loss provisions will provide banks with ample buffers against potential losses caused by the coronavirus outbreak.
And although cash inflow from loan repayments will decrease, a sharp moderation in loan growth will help banks maintain liquidity buffers. In addition, deposits will continue to grow as consumers and businesses cut spending, further helping banks’ liquidity.
by Arnon Musiker and Tengfu Li from Moody’s Investor Services