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Credit Conditions: Challenges Remain

For Some Asia-Pacific Sectors In Q2

Primary Credit Analyst:
Andrew D Palmer, Melbourne (61) 3-9631-2052; andrew.palmer@standardandpoors.com
Secondary Contact:
Fabienne Michaux, Melbourne (61) 3-9631-2050; fabienne.michaux@standardandpoors.com
Table Of Contents
Macroeconomic Environment: Steady Growth Is Expected Across
Financing Conditions
Global Risks And Imbalances
Sector Trends: Largely Stable With A Dash Of Negative
Related Research
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Credit Conditions: Challenges Remain For Some
Asia-Pacific Sectors In Q2 2014
(Editor's note: Standard & Poor's Credit Conditions Committees meet quarterly to review macroeconomic conditions in
each of four regions (Asia-Pacific, Latin America, North America, and Europe, the Middle East, and Africa).
Discussions center on identifying credit risks and their potential ratings impact in various sectors, as well as borrowing
and lending trends for businesses and consumers. This article reflects the view developed during the Asia-Pacifc Credit
Conditions Committee discussion on May 29, 2014.)
As expected, the overall credit outlook for Asia-Pacific issuers remained steady since our first-quarter Credit
Conditions Committee, with a 15% net negative outlook at end-April 2014, compared with 16% at end-February 2014.
While risks have generally subsided for the time being, flatter economic growth and potential financial market volatility
resulting from monetary policy normalization make for some potential credit headwinds for Asia-Pacific issuers.
Notable exceptions are automotive and oil and gas, for which Chinese consumer and investment appetite, albeit
dampened, remains a growth driver for both industries. Consequently the rating outlooks for these two sectors have
improved, as indicated by the net negative outlook percentage trending down over the past year.
On the other end of the spectrum, sectors in which the rating outlook have worsened, with the net negative outlook
percentage trending up, include the cyclical industries of chemicals, consumer products, metals and mining, real
estate, telecommunications, and transportation-cyclical. In between, we have sectors with more volatile outlook
trends, like capital goods, diversified, gaming and entertainment, retail, technology, and utilities. Sectors showing
steadier trends include financial institutions, healthcare, insurance, project finance, and transportation infrastructure.
Although the net negative outlook percentage for the building materials and forestry products sector had trended
down, this result is distorted by a company default (which removes its negative outlook). For government ratings, the
negative outlooks on the sovereign ratings on India and Japan have a knock-on effect on the ratings on public finance
The Standard & Poor's outlook for real GDP growth in Asia-Pacific is unchanged from March, but with a tilt away from
emerging economies. We have nudged down our 2014 growth forecast for China, which accounts for almost half of the
region's GDP, as investment growth moderates further, reflecting a re-pricing of credit--including an expanding
slowdown in the property sector. In contrast, growth in Japan has been revised upward following a strong first-quarter
surge in consumption in anticipation of the value-added tax rise imposed in April. Elsewhere, the election results in
India suggest that shortcomings in the fiscal and investment regimes are now more likely to be addressed, and the
still-expected but delayed pick-up in U.S. growth augurs well for the region's more trade-dependent economies. A
sharper-than-expected investment and growth slowdown in China stemming from a disorderly credit re-pricing
process remains the key risk for the region, although we would stress that a full-blown crisis strikes us as remote. We
would also note that the risk to Asian markets from the U.S. Federal Reserve's tapering of asset purchases has largely
passed, and that, given the recent run-up in debt in much of the region, the focus should be shifted to the impact of
rising U.S. short-term interest rates in the coming years.
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Soft economic prospects, mainly China-driven, and cautious financial markets continue to make for a
challenging environment for Asia-Pacific issuers in 2014. About 15% of issuer ratings are on net negative
outlook or CreditWatch with negative implications.
Despite a slower economy, China's consumer and investment appetite continues to drive growth in the
automotive and oil and gas industries, resulting in improvement in these sectors' net negative outlook
However, many other sectors are not as lucky. Chemicals, consumer products, metals and mining, real estate,
telecommunications, and transportationcyclical have seen their net negative outlook percentages worsened
over the past year.
Growth in Asia Pacific will remain steady this year, but with a tilt away from emerging markets.
China has started to move toward a more risk-based financial sector with tighter credit, rising rates, and even
some defaults. This is part of a long process, and has slowed growth further.
Japan saw a big jump in first-quarter activity, leading us to raise our growth forecast. The risk of a slide in
momentum and a return to deflation have fallen for now.
Elsewhere, elections in India and Indonesia suggest that growth-enhancing reforms are likely on the way, while
the region's trade-dependent economies should pick up, in line with our forecast of rising U.S. growth for the
remainder of this year.
The main risk to our baseline scenario calculation is a disorderly adjustment in the Chinese financial system to
a more market-based system, with the attendant decline in investment and growth. U.S. Fed tapering risks
have receding, although rising rates could cause stress given elevated debt levels.
Macroeconomic Environment: Steady Growth Is Expected Across Asia-Pacific
In our baseline macroeconomic scenario we expect steady growth in Asia-Pacific in 2014, although emerging Asia, led
by China, should have somewhat softer results than previously forecast. This reflects a weak start to the year, as
China's move toward more market-based pricing has begun and the global recovery has been delayed, hitting the more
trade-dependent economies. In contrast, the advanced economies, led by Japan, should see somewhat faster growth.
Turning to the numbers, for Asia-Pacific as a whole we see GDP expanding by 5.4% this year, unchanged from 2013.
For Emerging Asia we are now forecasting growth of 6.1% this year, down 0.2 percentage points from our previous
exercise. This revision reflects a forecast decline in Chinese growth, as well as lower growth in ASEAN due to
Indonesia and Thailand. Our growth forecasts for Asia Pacific as well as emerging Asia for 2015 and 2016 remain
Table 1
GDP Proposed Scenarios, June 2014
Baseline Downside Upside
(%) 2014f 2015f 2016f 2014f 2015f 2016f 2014f 2015f 2016f
Australia 2.7 2.8 3.1 1.8 1.7 2.6 3.1 3.4 3.4
China 7.2 7.2 7.0 6.0 6.0 6.6 7.8 7.6 7.2
India* 6.0 6.3 6.5 4.7 5.0 5.2 6.2 6.7 7.0
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Credit Conditions: Challenges Remain For Some Asia-Pacific Sectors In Q2 2014
Table 1
GDP Proposed Scenarios, June 2014 (cont.)
Japan 1.8 1.3 1.3 0.8 0.4 1.0 2.1 1.7 1.8
South Korea 3.9 4.1 3.8 2.5 1.7 3.6 4.8 5.1 4.1
Hong Kong 3.4 4.1 3.6 0.3 0.4 3.5 5.5 5.5 4.9
Indonesia 5.2 5.8 6.0 4.6 4.7 5.8 5.8 6.2 6.0
Malaysia 5.2 5.4 5.6 3.7 3.2 5.0 6.1 5.7 5.6
Philippines 6.6 6.0 6.1 5.3 4.8 5.7 7.0 6.7 6.6
Singapore 3.9 4.2 3.8 1.3 0.6 3.1 4.9 5.2 4.5
Taiwan 3.5 3.9 3.8 0.7 0.7 3.3 4.7 5.3 4.0
Thailand 1.1 4.3 5.0 0.1 3.4 4.9 1.8 5.6 5.4
Vietnam 5.5 6.0 6.3 4.5 4.5 4.7 6.3 6.5 6.9
New Zealand 3.5 2.6 2.5 1.9 2.0 2.1 3.8 3.3 3.0
Asia Pac 5.4 5.5 5.4 4.1 4.1 4.9 5.9 6.0 5.7
EM Asia 6.1 6.4 6.3 4.8 4.9 5.7 6.7 6.9 6.6
NIE 3.7 4.1 3.8 1.6 1.2 3.5 4.9 5.2 4.2
ASEAN 4.6 5.5 5.8 3.6 4.2 5.4 5.2 6.1 6.0
*Fiscal year ending March 31. RBI exploring a new monetary policy framework. Regional aggregates are calculated as a weighted average
using 2012 GDP measured in PPP terms.
We have shaved down our baseline growth forecasts for China and Indonesia, reflecting soft first-quarter outcomes. At
the same time we have increased our growth forecast for Japan by a half percentage point, reflecting the consumption
and growth boom that front-ran the implementation of the sales-tax rise on April 1. Our growth outlook for India
remains unchanged, while Korea's forecast rose. Turning to the other economies in the region: we have again marked
down our growth forecasts for Thailand, reflecting the coup mid-May, and have also revisited our growth forecasts in
the more export-dependent economies, given the delay in the U.S. recovery and the accompanying rebound in global
trade flows, as well as the re-basing of GDP series. Details appear below.
Inflation pressures should remain contained across the Asia-Pacific region because of still sub-potential growth in most
economies and lingering output gaps. Indeed, reflecting our softer growth scenario for emerging Asia, we have more
downward revisions to inflation forecasts this year than upward revisions. Exceptions are the antipodean economies as
well as parts of ASEAN, for which we see inflation drifting higher as recoveries build in the face of historically loose
monetary conditions.
As a result, we do not see generalized pressure to tighten monetary settings based on demand-side pressure. Again,
exceptions are New Zealand (where rates have been lifted twice already this year) and the Philippines and Malaysia,
where central banks are beginning to signal tightening biases.
We continue to assign a 60%-70% probability to our baseline scenario.
China's momentum has eased in recent months, but we still forecast growth at a healthy 7.2% for 2014 (7.4%
previously); our forecasts for 2015 and 2016 (7.2% and 7.0%, respectively) are unchanged. The main cause of the
slowdown has been investment, as the authorities continue to try to steer the economy onto a more market-driven
path while addressing the overhang of credit generated by the policy response to the global financial crisis. Despite
slower growth, the authorities seem comfortable with the state of play. There have been no announcements
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Credit Conditions: Challenges Remain For Some Asia-Pacific Sectors In Q2 2014
regarding any major macro stimulus plan even as growth looks likely to miss the official annual target of 7.5% this
year. Banks have been tightening lending standards, leading to slower credit and activity growth, and forcing riskier
borrowers into the non-bank (shadow) sector. Importantly, a number of defaults from smaller borrowers have been
allowed in early 2014, which points to a growing role for market discipline in the credit process. But these are early
days and it is likely that much more will need to be done to reach a point where the market plays a "decisive role" as
envisaged in the Third Plenum, thereby putting China on a more sustainable growth path. Whether China can
successfully navigate this transition is the biggest risk to the region in our view.
Japan saw a much larger-than-expected jump in growth in the first quarter, in advance of the consumption tax
increase, and we have revised our growth forecast upward by half a percentage point to 1.8% for this year. We have
kept our 2015 and 2016 forecasts unchanged. Growth in the first quarter of the year was 1.5%, or nearly 6%
annualized, led by consumption and non-residential investment. The risk of a serious loss of momentum that would
have led to a renewed fall in prices and required bold action by the Bank of Japan seems to have faded for now. The
second quarter could see negative sequential growth as a pay-back for shifting spending into the first quarter, but
the rebound under Abenomics on both the growth and inflation fronts seems secure for now.
India and Indonesia each held elections in the second quarter of the year, and in our view both outcomes were
positive for growth. A strong mandate for the new government in India looks likely to pave the way for reforms to
the fiscal subsidy regime as well as the investment environment. We continue to hold a 6% growth forecast for fiscal
2014 (ending March 2015), with a further pickup in the medium term. First-round elections in Indonesia also look to
be favorable for reform, and this will become clearer after the next round takes place in July. Growth shifted down
to 5.2% in the first quarter (the lowest since 2009) but should return to the 6% range in 2015-2016.
The expected rebound in the trade-driven Tiger economies has yet to take hold, although results across the group
are mixed. This reflects in large part the delay in the expected rebound in the U.S. Exports picked up in early 2014
in Korea, although the trend remains patchy. Exports in the rest of the group (Hong Kong, Singapore, Taiwan) to the
advanced economies remain subdued. We have raised our growth forecast for Korea in 2014, mainly because of
rebasing effects for the national account (Singapore's series was rebased as well, with little effect on growth). For
Taiwan, we have shaded our growth forecast down, reflecting a slow start to the year.
Our view on Australia remains broadly unchanged, with the main theme being the rebalancing of growth toward the
non-mining sectors. We continue to see growth in the 2.5% to 3% range in the near term. The effect of the
government's just-announced budget plan on activity should be minimal. And the Reserve Bank of Australia
continues to signal continued low rates ahead. We do see a faster-than-expected recovery in New Zealand, and
have raised our growth forecast there to 3.5% this year as the construction-led rebound takes hold, which raises the
likelihood of more Reserve Bank of New Zealand action in 2014.
In Southeast Asia, Thailand continues to dominate the story. In light of the effects of the mid-May coup on
investment and confidence, we have reduced our 2014 growth forecast to 1.1% as a recession now becomes a likely
outcome. The prognosis for the Philippines remains positive, and we would therefore expect more modest
tightening from the BSP. Malaysia and Vietnam should see steady growth ahead.
We continue to see the balance of risks to our Asia-Pacific baseline scenario as being on the downside. The main
downside risk remains the possible financial turbulence and investment fallout from the re-pricing of credit in China,
with a growing role for the property sector in that story. In contrast, downside risks to Japanese growth from the
consumption tax hike, as well as election-related growth risks in India and Indonesia, have lessened, in our view. The
main upside risk for Asia-Pacific is a stronger-than-expected U.S. recovery.
Our downside scenario, featuring slower investment and GDP growth in China stemming from the re pricing of credit,
retains a probability of 20%-25%. The main difference from our previous credit conditions report is that this process
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Credit Conditions: Challenges Remain For Some Asia-Pacific Sectors In Q2 2014
has actually begun. Specifically, the authorities have allowed a number of (relatively small) defaults to take place, risk
awareness is on the rise, and the timetable for putting in place deposit insurance (a key step in signaling what is
government guaranteed or not) has been advanced. While these are still early days, the process has begun, and it
remains to be seen whether purging the system of moral hazard will entail any dislocation in the credit markets and a
knock-on effect on investment.
Strains are now beginning to emerge in mainland China's property sector, as well. These include increasingly tighter
credit conditions, falling prices, and rising inventories. The key issue is locating the stress points in the system. In our
view, the residential mortgage sector looks fairly well insulated, with low leverage in the household sector and modest
bank exposure. The same cannot be said for developers, where less creditworthy players are increasingly shut out of
the banking sector and forced to turn to the so-called "shadow" system for financing, often at double-digit interest
rates. Should prices and sales continue to fall and/or inventories continue to build, we could see increasing stress in
this sector.
We would stress that in our baseline scenario Chinese growth will be largely unaffected by these developments. But in
our risk scenario we could see some turbulence centered in the non-bank financial sector, taking down investment
growth for a few quarters. China's substantial macroeconomics cushions suggest to us that the chance of a full-blown
crisis is remote.
Our upside scenario remains a faster-than-expected recovery in the U.S. (probability 15%-20%). This scenario would
disproportionately favor the more open and trade-dependent economies in the region, namely the Tigers plus Malaysia
on the assumption that global trade growth will follow U.S. GDP growth upward. Of course, faster U.S. growth will help
to support the larger economies in Asia-Pacific as well, helping Japan to keep the pace of activity and nascent inflation
pressures buoyant, and helping China to enjoy a bit of external demand to help offset slower domestic demand.
The cloud in the upside scenario is the path of U.S. interest rates should the economy pick up faster than expected. To
the extent that economies in emerging Asia import U.S. monetary policy through tying their exchange rates close to
the U.S. dollar, interest rates would rise in these economies as well, raising debt servicing and borrowing costs and
possibly depressing asset prices just as foreign demand recovers.
Financing Conditions
We expect that the majority of central banks in the Asia-Pacific will hold policy interest rates relatively steady in 2014,
as to varying degrees they shadow the Fed in anchoring the short end of yield curves. However, we think that market
interest rates of longer tenors are likely to creep up in 2014-2015, as the U.S. economy recovers and the Fed tapers its
asset purchases. A critical part of this process will be the strategies of central banks in managing interest rate rises as
they change the relative funding costs of issuers in the region.
While investment strategies vary across the region, we expect some large funds to continue to favor a carry-and-credit
strategy while keeping durations low until yields rise toward the levels seen at the end of August. Consequently, some
funds will emphasize the intermediate part of the yield curve while remaining defensive in longer maturity bonds and
buying selectively, in our view.
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Although we continue to see ongoing volatility in emerging market bonds, we believe that some dollar-denominated
emerging-market bonds will benefit from any rise in the U.S. currency, as the Fed moves closer to raising interest rates
from their record low.
Global Risks And Imbalances
The current top global risks are summarized in table 2.
Table 2
Top Global Risks Q2 2014
Risk Level* Trend
Geopolitical risk that leads to financial turmoil or economic shock (escalation of Ukraine crisis, Middle
East turmoil)
Moderate Increasing
Unexpected turbulence in Chinas financial sector, stemming from repricing of risk Moderate Increasing
Disorderly exit from quantitative easing and impact of Fed normalization of interest rates, particularly on
emerging markets
Moderate Stable
*Risk levels may be classified as very low, low, moderate, elevated, high, or very high. Trends may be classified as stable, decreasing,
or increasing.
As outlined in table 2, we point to increasing geopolitical risks around the globe. Tensions between China and Japan
remain, as do issues in Syria, Iran, and North Korea. Also continuing is the Ukraine crisis, and the tensions between
Western governments and Russia. These may have significant economic effects. However, the fallout would be hard to
quantify ex ante.
We continue to see recovery in the global economy, but we have not returned to "normal" conditions. The global
recovery continues to be primarily driven by the U.S., despite its flat growth in the first quarter, which was largely
weather-related. With U.S. fiscal risks having receded in the near term, the normalization of monetary policy remains
the key potential headwind. European cyclical recovery and structural improvement is progressing, although it is
unbalanced amid concerns of a boom-bust in the U.K. China appears to have achieved a soft landing, even as its
financial sector risks have heightened; while the Japanese economy appears to have absorbed the increase in the
consumption tax hike reasonably well. The Brazilian economy remains weak, hurt by weak consumer and business
sentiment that undermine investment as mixed signals continue ahead of this year's presidential elections. Industry
continues to struggle, with further downside risk from potential energy rationing.
One main global risk coming from the U.S. remains that of an adverse market reaction to the Fed's process of
monetary policy normalization. This will likely affect emerging markets more negatively than the U.S. itself, as the Fed
generally sets policy with specific domestically-oriented goals. For now, as we mention above, Asia-Pacific's markets
are being spared from market turbulence. However, further normalization over the medium term, particularly on
interest rates, and large unforeseen short-term fluctuations still hold the potential to destabilize Asian markets or
expose various weaknesses.
These risks fall under two general categories. The first is short-term funding stress due to capital outflows, which will
tend to affect economies that have large external and fiscal deficits. The second is the possibility of asset-price
corrections if global interests rise more rapidly than borrowers had expected, leading to difficulties in financing debt
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Credit Conditions: Challenges Remain For Some Asia-Pacific Sectors In Q2 2014
burdens. Economies that have increased leverage significantly over the past few years (Korea, Singapore, Malaysia,
and Thailand) may be the potential candidates. We continue to view a disruption in China's rebalancing as a risk.
Chinese financial sector risk is rising, as banking regulations and perceived state guarantees have led to high growth in
the shadow banking sector and a potential mispricing of risk in the system. Although not our baseline assumption, this
poses a significant risk if not managed to the growth in China and the Asia-Pacific region.
Sector Trends: Largely Stable With A Dash Of Negative
Risks relating to geopolitical developments and domestic politics are featuring more prominently in the Asia-Pacific.
Over the past few months, tensions over territorial disputes have risen between China and the Philippines as well as
China and Vietnam. Meanwhile, similar overlapping claims remain a strain on China-Japan ties. In Thailand, the
military coup in May highlighted the domestic tensions that continue to distract policymakers and pose security risks
to sovereign creditworthiness.
The recent geopolitical developments increase the risks of miscalculations that could damage international trade and
investment ties. More seriously, accidental military contacts could fan domestic sentiments that result in an escalation
of international confrontations (see "Shared Economic Interests In A Stable Asia-Pacific Should Help Contain
Geopolitical Risks"). We remain of the view that common interest in maintaining economic stability will continue to
prevent a serious escalation of geopolitical tensions.
In Thailand, widespread violence could result if coup leaders are perceived as being partial in their actions. Key
backers of both sides of the Thai political divide have significant business interests in the Kingdom. We believe that
these interests keep the risks of potential destabilizing actions from both sides at modest levels.
The slowdown in economic growth in China has led policymakers to consider easing policy restrictions to growth. In
an economy that has seen leverage rising markedly in recent years, policymakers face a delicate balancing act. An
inadequate response could drain confidence and trigger a sharper-than-anticipated slowdown. This could have a
negative impact on other economies in the region. On the other hand, excessive monetary easing could reignite credit
growth and longer-term risks.
Relatively high levels of domestic credit in other important economies--including Korea, New Zealand and
Australia--also constrain monetary policy as a countercyclical tool if they face a renewed economic slowdown (see "An
Asia-Pacific Credit Crisis Remains UnlikelyBut The Signs Are There," published Feb. 17, 2013). Like in China,
stimulating credit growth further via monetary easing could increase financial risks even if it lifts short-term growth.
Disorderly market responses or inappropriate policy responses to the withdrawal of quantitative easing are still a risk
to sovereign creditworthiness. Concerns over this risk have receded compared to March 2014. In part, this has
reflected investor optimism over election results in the two economies earlier deemed most susceptible to capital
reversals: India and Indonesia. Nevertheless, this could prove to be a temporary respite if this optimism proves to be
overdone in the future.
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Finally, a renewed global slowdown triggered by events in the U.S. or Europe could still hurt sovereign
creditworthiness in this region. However, latest indicators continue to show continued recovery in the major
developed markets.
As of late May 2014 two Asia-Pacific long-term sovereign ratings have negative outlooks and one has a positive
outlook. The remaining 19 carry stable outlooks.
Public Finance: Tax-Collection Key To Stability
The outlook for public finance is mainly stable (see table 3). The primary macroeconomic risk to several of
Asia-Pacific's local and regional governments (LRGs) relates to their ability to collect corporate, mining, employment,
housing, and consumption taxes. LRGs reliant on property rates, such as those in New Zealand, Australia, and Japan,
are not as vulnerable to national GDP conditions as many other LRGs tend to be.
Table 3
Asia Pacific Public Finance Trends, Next 12 Months
Sector Current Business Conditions Business Outlook Finance Trends Sector Outlook
Australian states Satisfactory No Change Same Stable
Local governments Satisfactory No Change Same Stable
Higher education Satisfactory No Change Same Stable
In Australia, the main risks to LRGs relate to consumption, specifically for the state governments that rely on the goods
and services tax to fund services; and transaction taxes associated with houses being bought and sold rather than sat
upon. Mining royalties are particularly important to the states of Western Australia and Queensland, and the soft
commodity prices are impacting both of these state's operating performance. These risks have begun to stabilize, with
revenue write-downs notably smaller in fiscal 2014.
In response to this slower revenue growth, the Australian states have undertaken structural rebalancing to varying
degrees, and we expect that the cost savings will start flowing through to the states' operating performances. Over the
medium term, this will support credit quality.
Of greater risk to the medium term is the withdrawal of Commonwealth government subsidies for the delivery of some
health and education services. In the short term, state budgets may be affected by a number of national partnerships
not being renewed. Over the medium to longer term, the Commonwealth's cancellation of a number of agreements is
likely to impact states' operating positions. At this stage, it is unclear as to how the state governments will respond and
whether new agreements will be negotiated.
In Japan, we expect the increase of the national sales tax to ease the credit risks of rated prefectures and cities. The
national sales tax rate will be increased to 8% in April 2014 and to 10% in October 2015, from its current level of 5%.
Both prefectures and cities will have a share of the revenues from the tax increase. In 2014, we also anticipate the
recovery of corporate profit tax that will further support the prefectures' tax collections, while the urban cities will
enjoy the pick-up of the property rates as the real estate market begins to show signs of recovery.
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Credit Conditions: Challenges Remain For Some Asia-Pacific Sectors In Q2 2014
Financial Institutions: Overall resilient despite ongoing pressure on asset quality
Standard & Poor's outlook for financial institutions in Asia-Pacific remains generally stable and unchanged from
March. The softer economic prospects (including China-driven slowdowns) as well as high level of household and
corporate debt in some countries continue to pressure on banks' asset quality. However, we expect the increase of
credit costs would be gradual and could be absorbed by banks' earnings. The sector's loan growth in the coming year
would be slightly lower compared to past years, reflecting the tightening monetary conditions and bank' selective
stance toward weaker credit. We expect that banking sector financial profiles will remain sound overall, sustained by
adequate capital and stable funding.
The key risk factors are slower economic growth beyond our downside scenario and a plunge in property prices,
ineffective domestic policies, and disorderly impact from U.S. monetary policy changes.
Compared with other regions, the banking sector has been characterized by resilience. We did not change the
economic and industry (BICRA) scores of any country in 2013--excepting Thailand. We assign stable economic trends
for most of the countries excepting Australia, New Zealand, India and Malaysia (see table 4).
We began to assign positive, stable, and negative trends scores in our view of economic and industry risk in the first
quarter, to better capture emerging risks (see "S&P to Publish Economic and Industry Risk Trends for Banks").
The downward revision of the BICRA score on Thailand in December 2013 reflects a rise in the country's private
sector and household debt. We believe the prolonged political uncertainty and the resultant slowdown in economic
activity could lead to a gradual rise of delinquencies in the Thai banking industry. Nevertheless, we expect the impact
to be manageable at this moment.
In China, we expect the banking sector's loan quality and profitability to slip further in 2014. Banks remain heavily
exposed to debt-laden local government financial platforms, and many manufactures saddled with oversupply. In
addition, distorted growth in China's shadow banking system could lead to an unintended build-up of credit risks.
Nevertheless, our views about banking industry risks in China, whose BICRA is group 5; incorporate a high degree of
risk and volatility.
India and Indonesia have been largely unaffected by the recent round of stress on emerging countries thanks to the
improvement of current account deficits and market confidence. That said, we expect the banking systems in these
countries to remain vulnerable to external capital outflow and a subsequent impact on domestic economy.
Table 4
Asia Pacific Banking Industry Trends
Economic risk factors Industry risk factors
risk in
risk score
risk trend
Australia 2 Very Low Intermediate Low 2 Negative Very Low Very Low Intermediate 2 Stable
China 5 Intermediate High High 6 Stable High High Very Low 5 Stable
India 5 High Low High 5 Negative High High Low 5 Stable
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Credit Conditions: Challenges Remain For Some Asia-Pacific Sectors In Q2 2014
Table 4
Asia Pacific Banking Industry Trends (cont.)
Indonesia 7 Very High Intermediate Very High 7 Stable Very High High Intermediate 7 Positive
Japan 2 Low Low Low 2 Stable Intermediate Intermediate Very Low 3 Stable
Korea 3 Intermediate Low High 4 Stable Intermediate Intermediate Low 3 Stable
Note: BICRA Group '1' to '10', from lowest to highest risk. Economic and Industry risk classified as "very low", "low", "intermediate", "high", "very high", or
"extremely high". For information about other Asia Pacific nations please see Banking Industry Country Risk Assessment Update: November 2013, Nov 6,
Insurance: Downside Pressure Eases For Insurers
We view credit trends for the Asia-Pacific insurance sector as stable, with the exception of the China life market and
Thailand property & casualty market, where we maintain a negative view, and some contagion from negative ratings
pressure on the global reinsurance sector. The insurance sector has a relatively low net negative ratings bias of 9% at
May 2014, which improved slightly from the previous quarter, in part from resolution of the negative outlooks in Korea
and Thailand relating to our "Ratings Above The Sovereign" criteria, and balanced by some ratings upgrades in the
Japan life sector on improved capital and earnings. The negative outlook on the Japan sovereign continues to
influence ratings/outlooks in that market, while a number of positive outlooks relate to unresolved merger and
acquisition activity in Taiwan and the Pacific.
While the sector outlook for reinsurance remains stable, we acknowledge that the business outlook is somewhat
weaker, with pressure on profitability from increased global player competition and ongoing premium rate declines
expected at the June/July 1, 2014, renewal season. Still-good market growth in Asia-Pacific versus markets like U.S.
and in Europe protects against a more negative assessment.
Table 5
Asia Pacific Insurance Trends, Next 12 Months
Current Business Conditions Business Outlook Finance Trends Sector Outlook
Life insurance Satisfactory No Change Same Stable
Property & casualty insurers Satisfactory No Change Same Stable
Reinsurers Satisfactory Somewhat weaker Same Stable
Key risks to the sector are: the economic slowdown in China and its impact on insurance product demand for the
wider region; ongoing low interest rates which constrain insurers' premium growth and earnings, investment market
volatility: capital pressures in higher growth markets, exposure to catastrophe and un-modelled risks, and reinsurer
In the life sector, capital pressure exists in rapid growth markets such as China and Malaysia. Low interest rates,
asset-liability mismatches, and investment-market volatility appear to be managed in Taiwan and Japan, with
improved demand and investment market conditions flowing through to capital and earnings. In Australia, high lapse
rates and disability claims patterns are continuing, with significant remediation action taken through pricing and
underwriting initiatives, although some structural reforms around stepped premiums and commission structures will
take longer to resolve.
In the property & casualty (non-life) sector, results have benefited from a relatively benign catastrophe environment,
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Credit Conditions: Challenges Remain For Some Asia-Pacific Sectors In Q2 2014
although risk potential remains. The market is benefiting from the softer reinsurance market conditions, although
pricing structures, and some regulatory pressure for higher upper layer and sideways covers are leading to greater
retentions being held, in our view.
Although too early to test, the increase in the consumption tax in Japan should adversely impact profitability, but may
be absorbed by revisions in premium rates and operating expenses. Growth in China remains strong, with support
from auto sales, but the sector is subject to increasing catastrophe-risk exposure and capital shortfall pressures, along
with strong competition. While we expect to see continued moderate release of flood-related reserves for direct
Thailand insurers, the current political unrest could pose short and medium term risk to insurers. Our Insurance
Industry and Country Risk assessment for Korea's property & casualty sector was revised to "Intermediate Risk" from
"Low Risk" and followed the lowering of our forecast for the market's growth prospects.
Softer reinsurance market-pricing is likely to continue on renewal. Un-modeled risks due to climate change and
urbanization will remain an industry issue.
Corporates: Metals And Mining Still Negative
About 17% (13% on net basis) of the corporate issuer ratings pool is on negative outlook or on CreditWatch with
negative implications. Among the 17 industries covered, we view the 12-month outlook for metals and mining as
negative, and for building materials, capital goods, chemicals, consumer products and real estate development, as
stable-to-negative (see table 6). The outlook on the other sectors (auto, diversified, gaming, oil & gas, real estate
investment trusts, retail, technology, telecommunications, transportation-cyclical, transportation infrastructure and
utilities) is stable. (Healthcare is not displayed in table 6 because the sector comprises just three rated entities). As
expected, there is some correlation between the sector outlook discussed here and the net negative ratings bias
discussed previously. However the primary focus of the former is on economic and industry risk for the sector, while
the latter, by definition, includes issuer-specific rating risks.
Table 6
Asia Pacific Corporate Trends, Next 12 Months
Corporates Business conditions Business outlook Financial trends Sector outlook
Automakers and components Satisfactory Somewhat stronger Same Stable
Building materials, forest products and packaging Satisfactory Somewhat weaker Same Stable to Negative
Capital goods, machinery Satisfactory No change Same Stable to Negative
Chemicals Satisfactory No change Same Stable to Negative
Consumer products, food Satisfactory No change Same Stable to Negative
Diversified Stable Somewhat weaker Lower Stable
Gaming Satisfactory No Change Same Stable
Metals and minerals Weak No change Same Negative
Oil and gas Satisfactory No Change Same Stable
Real estate development Satisfactory Somewhat weaker Lower Stable to negative
Real estate investment trust Satisfactory No change Same Stable
Retailing Satisfactory Somewhat weaker Lower Stable
Technology Satisfactory No Change Same Stable
Telecommunications Satisfactory No Change Same Stable
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Credit Conditions: Challenges Remain For Some Asia-Pacific Sectors In Q2 2014
Table 6
Asia Pacific Corporate Trends, Next 12 Months (cont.)
Transportation - cyclical Weak Somewhat stronger Same Stable
Transportation - infrastructure Satisfactory No change Same Stable
Utilities Satisfactory No change Same Stable
Structured Finance: Trends Stable Across Asset Classes
Structured finance credit conditions are satisfactory and the trends are stable (see table 7). Securities that have key
rating dependencies on transaction counterparties could continue to be affected the credit profiles of the
The economic outlook is mixed across countries in which outstanding Asia-Pacific structured finance securities are
predominantly domiciled. However, we do not expect any material increase in the unemployment rate, which
underpins the resilience of household debt serviceability, and therefore the collateral performance of most
residential-mortgage backed securities (RMBS) and asset-backed securities (ABS). Additionally, for seasoned
transactions, credit-enhancement percentages for senior-ranking notes have continued to strengthen while the quality
of underlying collateral has improved over time. These improvements augur well for ratings to withstand a mild
Table 7
Asia Pacific Structured Finance Trends, Next 12 Months
Current Business Conditions Business Outlook Finance Trends Sector Outlook
RMBS Satisfactory No Change Same Stable
ABS Satisfactory No Change Same Stable
CMBS Satisfactory No Change Same Negative
Structured credit Satisfactory No Change Same Stable
The Australian prime RMBS sector has significant exposure to lenders' mortgage insurance (LMI) cover, but most
senior-ranking note ratings could withstand lower ratings on LMI providers (currently in the 'AA' category) because of
additional credit enhancements that most transactions provide upfront. The ratings assigned to subordinated classes of
prime RMBS are more vulnerable to LMI providers' creditworthiness.
The number and volume of commercial mortgage-backed securities (CMBS) outstanding in the Asia-Pacific region
have continued to decrease due to a lack of new issuances and the ongoing repayment of existing transactions. We
expect a stable performance in the CMBS sector in 2014, except for some lower rated tranches of Japanese CMBS that
are currently vulnerable to nonpayment from realizing losses from commercial real-estate loans that have defaulted. In
Japan, the commercial property sector is recovering.
Most structured credit transactions coming out of the Asia-Pacific region are synthetic in nature and tend to follow
global trends because the reference entities are companies and financial institutions around the globe, rather than
regional ones.
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Credit Conditions: Challenges Remain For Some Asia-Pacific Sectors In Q2 2014
Related Research
Credit Conditions: Europe Inches Forward On A Murky Path, June 9, 2014
Credit Conditions: North America's Credit Conditions Remain Favorable, But Not Without Risks, June 9, 2014
Asia-Pacific Credit Outlook 2Q 2014: Auto And Oil & Gas Outperform Others As Negative Bias Persists, June 10,
Asia-Pacific Economic Outlook: China Embraces Risk And Japan Provides An Unexpected Boost, June 10, 2014
Table 8
CPI Proposed Scenarios
Base Downside Upside
2014f 2015f 2016f 2014f 2015f 2016f 2014f 2015f 2016f
Australia 2.7 2.7 2.8 2.5 2.0 2.1 2.9 3.0 3.2
China 2.5 2.9 2.6 2.3 2.1 2.0 2.7 3.2 2.7
India* 8.0 7.5 7.0 7.5 7.0 6.0 10.0 10.0 10.0
Japan 2.3 1.7 1.9 2.0 0.9 1.4 2.6 2.5 2.6
South Korea 1.8 2.8 2.8 1.4 1.9 2.2 1.8 3.2 3.1
Hong Kong 3.9 4.1 4.1 3.5 2.9 3.4 4.1 4.7 4.7
Indonesia 6.0 5.2 5.5 5.7 4.5 5.3 6.2 5.6 5.8
Malaysia 3.3 3.6 3.1 3.1 2.6 2.4 3.4 4.0 3.2
Philippines 3.9 3.5 3.7 3.8 2.9 3.3 4.1 3.9 3.9
Singapore 2.3 3.0 2.8 2.0 2.4 2.5 2.5 3.4 3.1
Taiwan 1.6 1.6 1.6 1.2 0.7 1.2 2.0 2.3 1.7
Thailand 2.5 2.5 2.7 2.3 2.0 2.3 2.7 3.0 3.0
Vietnam 6.9 6.5 6.1 6.6 5.8 5.4 7.0 6.9 6.5
New Zealand 2.0 2.1 2.1 1.3 1.5 1.7 2.7 2.5 2.2
*Fiscal year ending March 31, uses WPI.
Table 9
Policy Rates
Base Downside Upside
2014f 2015f 2016f 2014f 2015f 2016f 2014f 2015f 2016f
Australia 2.50 3.50 4.00 1.50 1.50 1.75 2.75 3.75 4.00
China 6.00 6.00 6.00 5.50 5.00 5.00 6.25 6.50 6.50
India* 8.00 8.00 8.00 7.75 7.50 7.00 8.00 8.50 9.00
Japan 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
South Korea 2.50 2.50 3.00 2.00 2.00 2.25 2.75 3.25 3.50
Indonesia 7.75 7.50 7.50 7.00 7.00 7.00 8.00 8.00 8.00
Malaysia 3.50 4.00 4.00 2.50 2.50 2.75 3.75 4.25 4.25
Philippines 3.75 4.25 4.25 3.00 3.00 3.25 4.00 4.50 4.50
Taiwan 2.00 2.50 2.50 1.50 1.50 1.88 2.13 2.63 2.63
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Credit Conditions: Challenges Remain For Some Asia-Pacific Sectors In Q2 2014
Table 9
Policy Rates (cont.)
Thailand 1.75 2.25 2.25 1.50 1.50 1.75 2.00 3.00 3.25
Vietnam 6.50 6.50 6.50 6.50 5.00 5.00 6.50 7.00 7.00
New Zealand 3.75 4.75 5.00 2.50 2.75 2.75 4.00 4.25 4.25
*Fiscal year ended March 31.
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Credit Conditions: Challenges Remain For Some Asia-Pacific Sectors In Q2 2014
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