S&P Says Asian Industries to Weather the Credit Storm
Challenging operating conditions have increased the risk of corporate credit defaults in Asia, but the overall outlook for Asia’s industries remains sound.
This is the main conclusion of a new report from Standard & Poor’s “Asia’s Corporate Sectors Will Roll With “The Punches In 2008.”
S&P says domestic challenges, such as rising inflation, will outweigh external issues as having the biggest impact on credit health, but also notes that default rates are currently at an historical low.
“A slew of domestic challenges in China, including rising inflation and soaring raw material costs, is piling on the pressure for Chinese companies, with a knock-on effect in Hong Kong and Taiwan,” S&P says. “For their ASEAN neighbors–Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, and Vietnam–conditions will be even tougher, stemming in part from the heavy debt-burden of previously feverish M&A activity.”
“Turmoil in the U.S. markets will also have an impact but not to the same extent. The U.S. is the biggest market for Asian exporters, so any significant slowdown would reduce demand, eat into profitability, and undermine economic growth, external balances, and fiscal trajectories. The strengthening of most Asian currencies against the U.S. dollar could weaken U.S. demand for Asian exports.”
In Greater China, a U.S. recession would hit Taiwanese companies hardest, followed by exporters in Hong Kong and then China.
Given the challenging operating conditions, Standard & Poor’s Ratings Services expects:
- Rating volatility and defaults to increase
- Credit quality in Asian markets to significantly diverge
- ASEAN companies to be under greater pressure than their Greater China counterparts, and
- The overall outlook for Corporate Asia to remain sound.
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