Moody’s: Outlook for Asia Pacific Sovereigns, Corporates and Financial Institutions Stable

China's LGFVs under pressure

As of June, number of companies most at risk of losing their investment-grade ratings, potential fallen angels, in Asia, excluding Japan and Australia, climbed to 21 from 8 at the end of 2019, due to lower earnings and cash flow caused by the global coronavirus shock - Photo: Privacy

Singapore — Moody’s Investors Service says that the outlook for Asia Pacific sovereigns, corporates and financial institutions is generally stable, while China’s local government financing vehicles (LGFVs) are under pressure, but will likely undergo consolidation and transformation.

“Our outlook for sovereign creditworthiness in Asia Pacific (APAC) in 2018 is stable overall, reflecting a favorable growth environment that will amplify the credit benefits of past reforms and encourage some sovereigns to implement further measures, particularly in the emerging markets,” says Martin Petch, a Moody’s Vice President and Senior Credit Officer.

“This favorable environment balances high leverage in various sectors, which continues to represent a credit constraint for many sovereigns in the region,” says Petch.

“With Asia’s corporates, steady economic expansion and corporate earnings
growth will underpin expectations of stable credit quality and drive deleveraging,” says Clement Wong, a Moody’s Associate Managing Director
for Corporate Finance.

“On the issue of Chinese LGFVs, these entities will need to transform to adapt to a changing operating environment, and we expect their credit quality will diverge even among some located in well-developed regions,” says Ivan Chung, a Moody’s Associate Managing Director for China research.

“With Asian infrastructure, the key trend we are seeing is greater funding diversity, and this augurs well for the sector, given the huge infrastructure requirements apparent in the region,” says Ray Tay, a Moody’s Vice President and Senior Credit Officer for Project & Infrastructure Finance in Asia Pacific.

“A notable example was the Paiton Energy project bond issuance, which
marked the return of Asian project bonds raised in the offshore debt capital markets after many years of absence,” says Tay.

“And with Asia’s banking sector, the outlook is stable as favorable economic conditions support the banks’ solvency and liquidity metrics,” says Ray Heung, a Moody’s Senior Vice President for financial institutions. “Furthermore, macroeconomic conditions have stabilized in most APAC economies and improved in some parts of the region, easing asset quality risks.”

“In the sector of insurance, a steady economic momentum across the APAC
economies, led by China (A1 stable), is driving demand. Together with the
solid solvency levels of insurers, these factors support a stable outlook
for the region’s insurance sector for 2018,” says Qian Zhu, a Moody’s
Vice President and Senior Credit Officer.

“Insurers have also adapted to low interest rates by shifting to less
interest-sensitive products and increasing their allocations to higher-yielding non-traditional assets, although for some — such as Chinese insurers — the latter has resulted in rising asset risk,” adds Zhu.