There will be no immediate impact on AsiaPacific sovereign ratings resulting from the lowering of the issuer credit ratings on the US to ‘AA+’ on Friday, Standard & Poor’s Ratings Services said today amid selloffs across the region.
However, long term consequences could be negative, it noted. S&P on Friday cut the US rating for the first time in 70 years, sparking market selloffs in the region including Thailand. The Thai market index lost more than 20 points in the morning session.
“For the moment, the generally stable outlooks for Asia Pacific sovereigns (with the exception of New Zealand, Japan, Vietnam, and the Cook Islands) is supported by sound domestic demand, relatively healthy corporate/household sectors, plentiful external liquidity, and high domestic savings rates.
“Our baseline assumption of no likely abrupt dislocations in developed economies’ financial and real economies underpins this opinion,” the rating agency said in the statement.
The US rating change, together with the weakening sovereign creditworthiness in Europe, does point to an increasingly uncertain and challenging environment ahead. Uncertainties in the global financial market and weakened prospects in the developed economies have further undermined confidence. The potential longerterm consequences of a weaker financing environment, slower growth, and higher risk aversion are negative factors for AsiaPacific sovereign ratings.
“Given the interconnectivity of the global markets, an unexpectedly sharp disruption in developed world financial markets could change the picture. It could lead the US and European economies into deep contractions again, or further delay their recoveries.”
In this scenario, the experience of the global financial crisis of 2008-2009 shows that export-dependent economies with large exposures to the US and/or Europe would feel the most pronounced economic impacts. It’s not likely things would be very different this time. US and Western Europe remain significant markets for Asia-Pacific exports, even if their importance has declined over the past couple of years compared with intraregional and Central & Eastern European/Middle East/Latin American trade.
“Specifically, Thailand, Taiwan, Korea, Malaysia, the Philippines, Japan, Australia, and New Zealand are likely to experience export-driven slowdowns either through weaker demand or lower export prices, or both.”
At the same time, the Asia-Pacific sovereigns that have weaker external positions could come under pressure as international liquidity tightens. Some may require additional external assistance to prevent sharp economic adjustments. Those with financial systems reliant on off-shore markets may face reduced liquidity and a heightening of refinancing risk in the near term. To varying degrees, Pakistan, Sri Lanka, Fiji, Australia, New Zealand, Korea, and Indonesia may be affected.
The adverse impact on Asia Pacific in that scenario would likely require governments to use their balance sheets to support their economies and financial sectors once again.
“In our opinion, most governments would promptly oblige. But some of them continue to bear the scars of the recent downturn—the fiscal capacities of Japan, India, Malaysia, Taiwan, and New Zealand have shrunk relative to pre-2008 levels. If a renewed slowdown comes, it would likely create a deeper and more prolonged impact than the last one. The implications for sovereign creditworthiness in Asia-Pacific would likely be more negative than previously experienced, and a larger number of negative rating actions would follow.”
In a subsequent statement, Standard & Poor’s added that there is no immediate impact on Asia-Pacific corporate, financial institutions, project finance, or structured finance ratings resulting from the US rating downgrade.
There is no immediate impact on Asia-Pacific sovereign ratings, although the potential longer-term consequences of a weaker financing environment, slower growth, and higher risk aversion are negative factors.
Corporates & Infrastructure
The direct impact on Asia Pacific’s corporate and infrastructure sectors is likely to be limited. However, a prolonged market disruption–given the interconnectivity of the global markets–would possibly result in increased spreads, reduced liquidity, and heightening refinancing risks. This would most adversely impact highly leveraged entities seeking rollover of debt or new funding. Having said that, a large number of infrastructure companies, utility companies, and Chinese property developers have been taking active forward measures in their debt scheduling. Further, significantly weaker U.S. demand would likely dampen sentiment worldwide, and hence could place strong pressures on the profitability of large exporters from China, Korea, Japan, Singapore, and Hong Kong. Additionally, the corporate sector would need to contend with fluctuations in exchange rates and sharp movements in input costs (higher spreads and commodity price movements).
In our opinion, the immediate effect on the Asia-Pacific financial sector would, at worst, be a rise in spreads that would marginally raise the funding costs of the Australian, Korean, and Japanese banks that have some dependence on offshore funding markets. A sharp market reaction in Asia Pacific–especially if there is reduction/reversal in capital inflows from the U.S. and Europe–could impact a broader swathe of banks and insurers through declines in the market values of their investment assets (mark-to-market accounting) and pressure on their capital market-dependent income. Credit quality of banks’ corporate loan books, especially the export sectors, could come under pressure if financing costs rise simultaneously with declining revenue. The overall near-term impact could dent the sector’s profitability, but would unlikely inflict damage to balance sheets. We do not expect the market impact to be severe enough to erode depositor confidence, which should sustain the retail deposit base that is the mainstay of funding for Asia Pacific’s banks. Given the still-positive economic growth prospects of Asia Pacific, the region’s healthy household and corporate sectors, and the generally sound financial profile of Asia Pacific’s financial institutions, we do not expect rating changes to result from this development.
The direct impact on Asia Pacific structured finance markets is also likely to be limited, at this stage. While there is a small number of transactions that may have direct exposure to U.S. sovereign debt by way of collateral investments, it is relatively modest. The more likely rating impact would likely be through counterparty exposures to regional and global banks should they be affected by altered market conditions. Additionally, the potential impact of broader economic and liquidity access could indirectly impact structured finance ratings performance over time.
Source: The Nation