Bottom-up study of three emerging asia economies reveals developing challenges: S&P

S&P says India has to unlock the earnings potential of existing assets

An inaugural "big data" study of three major emerging Asia economies from the ground up has revealed some developing challenges, said Standard & Poor's Ratings Services today in a report titled "Top-Down And Bottom-Up Views For Three Big Emerging Asia Economies--Do They See Eye To Eye?"

Using company-level financial data from S&P Capital IQ aggregated by sector, Standard & Poor's studied four major sectors in China, India, and Indonesia: consumer discretionary, energy, industrials, and materials, which includes mining.

"At the regional level, debt growth has pulled ahead of capital expenditure and earnings growth, which suggests some credit quality deterioration," said Paul Gruenwald, Standard & Poor's Asia-Pacific chief economist. "The implication is that an increasing amount of debt was needed to sustain a given increase in output. So either debt has to be reined in, or earnings and capital expenditure need to rise."

The consumer discretionary sector at the regional level has relatively favorable credit quality. "This is perhaps not too surprising, given that it is a less capital (and debt) intensive sector. But it does suggest that credit quality concerns are not a constraint on rebalancing growth toward consumption, particularly in China," Paul Gruenwald noted.

"China appears to have a credit quality issue, according to our study. While the sharp rise in debt post-financial crisis initially led to higher capital expenditure and earnings, those effects have faded. The implication is that credit growth and debt creation need to slow, and the authorities have started to address that," Paul Gruenwald said.

India has a different scenario. Earnings have plateaued but debt has continued to rise, while investment slumped. We believe policy gridlock and administrative red tape have hindered investment. The challenge now is to unlock the earnings potential of existing assets.

Indonesia's profile seems most balanced but it is also slowest in growing. Although debt, capital expenditures and earnings are trending together, their growth rates are below nominal GDP, suggesting a need for reforms to boost the capital markets for investment and growth.

"An economist's view from 35,000 feet is a useful way of identifying and analyzing the big macro trends. But, as we have seen in this study, the bottom-up view yields additional insights and challenges," Paul Gruenwald said.

"The resolution it offers leads to a better understanding of the quality and sustainability of growth."

Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating.

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