The credit rating trend for corporates in Asia is seen stabilizing in 2017, but uncertainty in the global capital markets that may arise from policy moves by the US Federal Reserve, the European Central Bank and China could disrupt that stability, Moody’s Investors Service warned.
Moody’s explained in a report released on Monday – “Credit Strategy & Standards: Asian Non-Financial Corporates’ Negative Rating Trend Will Likely Moderate in 2017 – that more US Fed rate hikes, China’s tightening of capital controls and less asset purchases by the ECB could cause uncertainty for the capital markets and hurt Asian ratings.
For all of 2016, there were 113 negative rating actions on Asian corporates; a number which significantly outpaced the 30 positive actions during the year, Moody’s said in the report.
On a positive note, Moody’s said the rating trend for corporates in Asia is stabilizing in 2017, with the share of ratings with negative implications down to 33 percent by the end of the fourth quarter of 2016, from a peak of 40 percent a quarter earlier, although it was still higher than the 21 percent posted at end-2015.
The share of ratings with stable outlooks increased to 60 percent at end-Q4 2016, but the level was still somewhat below the 69 percent seen at end-2015, said.
“Our expectation of a moderating trend reflects the partial recovery made by commodities prices, the monetary policy of major central banks—with the exception of the US Fed—remaining accommodative, continued solid growth in the US, and growth in China stabilizing at close to the official target.”
However, Moody’s pointed out there are a few factors which will lead to uncertainty in the capital markets and could reverse the stabilizing rating trend in 2017.
“The US’ interest rate hike in December 2016, the possibility that the ECB [European Central Bank] might scale back its asset purchases, and China’s tightening of capital controls could cause uncertainty or volatility in the capital and credit markets,” it said.
Moody’s explained that the US Federal Reserve raised interest rates in December 2016, and the Fed anticipates three further hikes in 2017; a development which— if it occurs—would have negative implications for corporates in Asia Pacific, such as for companies holding large US-dollar debt without matching cash inflows.
Lastly, it said the possibility that the ECB could reduce the scale of its monetary stimulus program in 2017, and the Chinese government’s tightening of capital outflows could also lead to increased volatility in the markets.