Asia’s credit is still good at Moody’s with the wider region likely to remain among the fastest-growing globally this year, according to the agency’s latest report on the state of lending and borrowing across India, China and into the Pacific.
While acknowledging a horizon of challenges that could weigh on credit conditions for Asian debt issuers, Moody’s managing director and chief credit officer for Asia Pacific, Michael Taylor, was roundly upbeat about the fundamentals of the regions key banking sectors.
“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," he said.
"Nevertheless, Asian sovereigns, companies and banking systems demonstrate inherent strengths that will help them withstand these challenges."
Moody’s report titled "Asia Credit - 2017 Outlook: Challenging Global Environment to Test Asia's Robust Credit Fundamentals," reserved special praise for China’s “multi-pronged” fiscal and monetary policies, which last year held GDP growth at the target of 6.7 per cent as well as reducing downside risks to the regional growth outlook in the near term.
However, Taylor warned that investment-led growth could be difficult to sustain, as it inflates debt levels in state-owned enterprises (SOE’s) and the private corporate sector, exacerbating long-term structural challenges.
Without further reforms, China’s structural imbalances will further erode corporate and bank credit quality over time.
Zhang Xingrong, managing director at the BOC Institute of International Finance last week observed that China still faces long-term challenges.
“China’s banking industry still needs to press ahead with reforms and improve its efficiency to serve the real economy and shoulder social responsibility to keep building up a good reputation and branding recognition,” Zhang said.
India's immense potential
For the first time, China’s banking brand valuation increased 25 per cent to US$259.2 billion this year surpassing the United States as the top country, according to an industry survey by the UK-based The Banker magazine.
Moody’s said India - with its favorable demographics, “immense potential” and encouraging progress on structural reforms - is demonstrating “relatively robust growth prospects,” despite the disruptive hiccup of Prime Minister Modhi’s surprise demonetization measures in late 2016.
For the banking sector, Moody's holds negative outlooks on six of 16 banking systems in Asia Pacific. A quarter of Asian banks now carry negative outlooks compared to 6 per cent at year-end 2015.
Moody’s has previously suggested that a more challenging operating environment for the banks in the region could lead to a deterioration in their asset quality and profitability.
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,” the report noted.
“Moreover, the vast majority of Asian banks are deposit-funded, a credit strength.”
Another buffer dear to Moody’s heart is the banks' good level of reserves against problem loans, with an average 120 per cent ratio for Moody's-rated banks.
A GDP slump across countries like Mongolia (Caa1 stable), Malaysia (A3 stable) and Papua New Guinea (B2 stable), has not shaken the agency’s bullish near-term growth outlook for the region as a whole.