Announcement: Moody's: Challenging global environment will test robust credit fundamentals of Asian sovereigns, corporates, banks in 2017

Moody's Investors Service says that Asia will remain among the fastest-growing regions globally in 2017, but it faces several challenges that could weigh on credit conditions for Asian debt issuers.

"Challenges surrounding China's structural reforms, higher interest rates in the US, rising protectionist sentiment in advanced economies, potential political shifts in the EU, and elevated leverage in Asian economies all pose risks in the year ahead," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific.

"Nevertheless, Asian sovereigns, companies and banking systems demonstrate inherent strengths that will help them withstand these challenges," adds Taylor.

Moody's analysis is contained in its just-released report titled "Asia Credit — 2017 Outlook: Challenging Global Environment to Test Asia's Robust Credit Fundamentals".

Moody's report says that China's (Aa3 negative) multi-pronged fiscal and monetary policies kept its GDP growth at 6.7% in 2016, which reduces downside risks to the regional growth outlook in the near term. However, investment-led growth could be difficult to sustain, as it leads to higher debt levels in the state owned enterprises and private corporate sector, exacerbating long-term structural challenges. In the absence of effective reforms to maintain productivity and address high leverage in the economy, structural imbalances will continue to weigh on China's outlook and erode corporate and bank credit quality over time.

As for India (Baa3 positive), the country demonstrates relatively robust growth prospects in the medium term — owing to its favorable demographics, immense potential for productivity catch-up and encouraging progress on structural reforms — despite a short-term economic disruption from the implementation of demonetization measures in late 2016.

Asian industrial activity and merchandise exports have shown signs of stabilization — following a mild contraction in 2016 — which bodes well for future economic growth. Although GDP in some Asian economies, such as Mongolia (Caa1 stable), Malaysia (A3 stable) and Papua New Guinea (B2 stable), have fallen short of Moody's previous forecasts, Moody's expects that the near-term growth outlook in the region will improve.

With non-financial corporates in Asia, the report says that for Moody's-rated non-financial companies in Asia, stabilizing economic growth and a mild recovery in global commodity prices will support revenues and cash flow for many sectors.

In particular, Asian companies should see a slight improvement in leverage metrics in 2017, owing to moderate earnings growth. Moody's estimates that debt/EBITDA for Moody's-rated corporates remained elevated at 5.1x at end-2016, on a trimmed average basis. Moody's expects leverage on the same basis to improve slightly to 4.9x in 2017. This result will mark a turning point, because leverage has deteriorated steadily from 3.8x in 2011.

For the banking sector, Moody's holds negative outlooks on six of 16 banking systems in Asia Pacific. In terms of individual bank outlooks, one-quarter of Asian banks carry negative outlooks compared to 6% at year-end 2015. This result mainly reflects Moody's expectation that a more challenging operating environment for the banks in the region could lead to a deterioration in their asset quality and profitability.

The divergence in Moody's outlooks for Asian banks (negative) and corporates (stable) is explained by the banks' much higher exposure to unrated companies, and to overleveraged households in some countries.

Further downside risks for the banks come from the buildup of corporate and household indebtedness in some Asian economies, downward pressures on domestic currencies — amid volatile capital flows — and elevated housing prices in parts of the region.

Nevertheless, these risks are partly contained by the banks' solid and growing capital buffers, with Indian, Vietnamese and Sri Lankan banks representing negative outliers. Moreover, the vast majority of Asian banks are deposit-funded, a credit strength. Another buffer is the banks' good level of reserves against problem loans, with an average 120% ratio for Moody's-rated banks.