S&P flags risks from China slowdown, US rate tightening

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DEBT watcher Standard and Poor’s Ratings Services said most of the financial institutions in Asia Pacific enjoy a stable outlook but there are risks stemming from the economic slowdown in China and the tighter monetary policy in the United States.

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In a report titled “Navigating A Delicate Balance In Asia-Pacific: China Growth, Credit Risk And Increased Market Volatility,” S&P said about 80 percent of the Asia-Pacific region’s financial institutions have a stable outlook.

“By contrast, with recent rating developments in Western Europe, our base case is that we currently expect governments in many Asia-Pacific countries would provide extraordinary support to systemically important private sector banks in the unlikely event it was required,” it said.

S&P said an economic slowdown in China continues to be a key risk and it believes that a major disorderly property adjustment in China would lead to material negative spillover effects for the economies and banking sectors in the region.

More generally, domestic property risks are a potentially sensitive rating factor in some Asia-Pacific financial institutions sectors, it said.

S&P noted that the economies that are likely to be affected were Australia, New Zealand, Hong Kong, Singapore, Korea, and Malaysia, adding that in each of these economies, home loans and real-estate loans account for a significant portion of bank lending.

Intermediate negative effect
“While there appears to be a relatively low probability in most of the region’s banking systems of an economic slowdown in 2015 that is significantly worse than our current downside scenario, the impact would likely be an intermediate negative effect,” it added.

“In India and Vietnam it could have a potentially higher negative impact, as we believe that respite is still some way off for the stressed asset cycle that is already weighing on the performance of these two banking systems,” the ratings firm continued.

Besides China’s slowdown, S&P said the potential effects of tighter monetary policy in the US and the subsequent run-up of market rates could trigger interest rate hikes in global and local markets.

This scenario will likely negatively impact some countries’ banking sectors in the Asia-Pacific, including Singapore, Hong Kong, and the Philippines, it said.

Earlier, S&P lowered its economic growth expectations this year for Asia Pacific, including the Philippines, but still sees the country besting other Southeast Asian economies amid the slowdown in the region.

Overall gross domestic product (GDP) in Asia Pacific may expand by only 5.5 percent in 2015, instead of 5.6 percent as previously expected, due largely to a lack of export response to the incipient recovery in the US, the absence of a rebound in spending from the drop in global oil prices, and the ongoing correction in the Chinese property market, the credit rating agency said.

S&P forecasts Philippine GDP to grow by a slower 6 percent this year, instead of 6.2 percent as previously projected.

The outlook for the Philippines in 2015 falls below the country’s expansion of 6.1 percent in 2014 as well as from the government’s growth assumption 7 percent to 8 percent.

Despite this, S&P said its 2015 growth forecast for the Philippines is higher than its growth projection for Indonesia (5.4 percent), Malaysia (4.6 percent), and Thailand (3.4 percent).

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