Debt watchers Standard & Poor’s (S&P) Global Ratings and Fitch Ratings warned that the Brexit’s indirect effects on trade and investment might challenge the Asia-Pacific region going forward despite the limited impact of the UK’s vote to exit the European Union at present.
“Brexit will affect both the real economy and markets in Asia-Pacific. In the near term, the real economic impact is likely to be largely neutral, but in the medium term, it may be significant if lower global economic growth depresses the region’s exports and investment activity,” S&P said in a report.
The credit rater said Brexit is expected to be challenging but is not likely to have widespread near-term negative rating consequences for homegrown Asia-Pacific banks and other financial institutions, “albeit it’s still early days as the geopolitical ramifications of Brexit are yet to fully play out.”
S&P, nevertheless, believes that the ratings of some Asia-Pacific financial institutions with relatively higher direct exposures to the UK or closer linkages to the UK than their peers may face pressure.
That said, the direct exposures of most Asia-Pacific financial institutions to the UK appear to be manageable at current rating levels, it said, but noted that potential credit-quality problems may arise because the region’s financial institutions’ indirect exposures related to the eventual fallout from Brexit could be meaningful, and may be difficult to predict.
Most importantly, the ratings agency pointed out that currency or commodity price volatility, and potentially less liquid capital markets could adversely affect corporate borrowers.
This in turn could negatively influence bank credit quality, it warned.
Nevertheless, S&P expects that banks will satisfactorily manage their assets and liabilities, including currency hedging, consistent with current ratings, and will adequately manage their funding risks, in particular Asia-Pacific banks reliant on offshore wholesale funding markets.
For its part, Fitch said the spike in political uncertainty in the UK—and the resulting effects on investor risk appetite—could pose the greatest challenges for Asia in the short term.
“If protracted uncertainty has a sustained effect on investor and consumer confidence, the resulting tightened liquidity conditions and pressure on emerging markets’ capital markets could weigh on growth in the region,” it stated.
Indirect trade effects should the Brexit vote lead to wider political instability and a broader slowdown in Europe could be more significant for Asia, with the EU as a whole accounting for a much larger share of Asian exports than the UK alone, it said.
The credit watchdog noted that exports to the UK equate to less than 1 percent of gross domestic product and account for less than 3.5 percent of total exports for every Asian country.
But the effects should take time to materialize, and Fitch believes that it is the smaller economies in Europe that are most at risk from Brexit—as opposed to the larger economies such as Germany and France which account for the bulk of Asian exports.
In the meantime, Fitch maintained its base case for APAC sovereigns and banks, as it believes that emerging Asia will remain the fastest-growing global region.
“Rising political uncertainty in Europe may lead to some downward revisions to regional growth projections, depending on how serious this turns out to be. However, China is likely to remain a much more significant driver of economic outcomes in APAC than Brexit, while risks from tightening US monetary policy also remain a key challenge,” it said.