Moody's sees stable outlook for Asia Pacific sovereigns; negative outlook for banks

Moody's Investors Service says that the outlook for Asia Pacific's sovereigns is stable in 2017, reflecting a mix of credit-supportive increases in incomes and strengthening institutions, and a credit-challenging external environment with slow global trade and capital outflows.

Moreover, political risk, although generally low, is becoming increasingly unpredictable.

At the same time, the outlook for Asia Pacific's banks is negative, in view of challenges related to asset quality and profitability, while China's ongoing process of reforms -- including that of state-owned enterprises (SOEs) -- remains a key determinant for future growth.

"Global conditions are largely unfavourable for sovereigns in Asia Pacific, which are reliant on trade and capital flows. Furthermore, in some cases, the presence of large financing needs -- stemming from current account or external debt -- means direct exposure to capital flows," says Marie Diron, an Associate Managing Director with Moody's Sovereign Group.

Moody's says that increasing capital flows into Asia Pacific in recent years have contributed to higher leverage.

"With the banking system, Moody's sees a negative outlook because challenging operating conditions in the region are weighing on the banks' asset quality and profitability," says Stephen Long, Moody's Managing Director for Financial Institutions in Asia Pacific.

In such an environment, problem assets will continue to rise, foreign private capital flows will remain volatile, and property price increases in some parts of the region will further amplify credit risk for the banks.

"With the corporate sector, steady macro conditions and the partial recovery in commodity prices support stability in credit quality, but the details differ for each economy in Asia Pacific," says Gary Lau, a Managing Director in Moody's Corporate Finance Group for the region.

Financial leverage for private-sector companies will remain broadly stable due to earnings stability and/or manageable levels of capital expenditure, while steady economic growth, low commodity prices and competitive edges among companies support stable earnings.

Stable outlooks are existent for key sectors across Asia, including China property, refining & marketing, telecommunications and power; but challenges will continue for the steel sector.

For Asia Pacific corporates as a whole, the funding environment will remain favorable.

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