Moody's expects stable credit quality in Asia in coming year

“The Asian region can withstand increased headwinds that are likely in 2014, including slower economic growth in China, the US Federal Reserve scaling back on its bond-buying programme and the potential bursting of asset bubbles,” said Michael Taylor, Moody’s managing director and chief credit officer for Asia-Pacific.

Moody’s conclusions are contained in its just-released report titled “Asian Credit Is Stable, Despite Strengthening Headwinds”.

“We do not expect balance-of-payments crises when the US Federal Reserve scales back its bond-buying programme, even in countries which have recently been under the greatest exchange-rate pressure,” Taylor said.

“Sovereigns have built up large reserve buffers and used flexible exchange rates to absorb shocks, and most banking systems are funded with deposits and have little offshore wholesale funding exposure, with the exceptions of Korea, Australia and New Zealand,” he said.

On possible asset bubbles, Taylor said the banking sector had significant buffers against falling real-estate prices, because or generally low loan-to-value ratios and strong regulatory oversight.

“In addition, refinancing risk is manageable for the Asia-Pacific corporates that we rate, as most of the maturities are for investment-grade companies that are blue chips in their home or regional markets and will continue to have access to domestic banking systems and local bond markets,” Taylor said.

“However, in Japan, while evidence is growing that efforts to revitalise the economy through Abenomics are gaining traction, the gains so far have been temporary. Sustained growth can only be achieved through supply-side measures, labour-market reforms and deregulation.” 

According to a Moody’s report, the slow pace of recovery in the advanced economies is constraining demand for the region’s exports, as the advanced economies remain the most significant sources of external demand for Asia. 

The report points out that while China has grown in importance as a source of regional demand, the United States and the European Union are still much more significant destinations for the region’s exports. In addition, growth in China should be slower in future than in the past three decades.

Moody’s report also said that slower growth in China would have adverse effects on the economic growth and government finances of countries that export natural resources, and there had already been some signs of an impact in Australia and Indonesia. Manufacturers’ exports from Japan, South Korea and most Asean economies have also suffered from a drop in demand from China.

As part of its report, the creditworthiness of governments in Asia compares favourably to those in other regions thanks to generally sound public finances, capital-account surpluses and robust banking systems. 

Of the 22 Asia-Pacific sovereigns it rates, 19 have “stable” outlooks, two “positive” and one “negative”. 

Three regional sovereigns (Indonesia, the Philippines and South Korea) have received multiple ratings upgrades since September 2008, and it has downgraded only the government bonds of Japan, Pakistan and Vietnam since then.

In the banking sector, it has “stable” outlooks on nine of the 15 Asian banking systems and a “positive” outlook on one. The outlooks are “negative” for the banking systems in Hong Kong, Singapore, India, Mongolia and Vietnam.

Nonetheless, banks in Hong Kong and Singapore are among the highest-rated in the world; their “negative” outlooks reflect Moody’s belief that the credit cycles in these jurisdictions have peaked. 

Moreover, those two banking systems remain strongly capitalised and highly liquid, features they share with most other systems in Asia.