Unwinding govt support may increase default risks among weaker companies in 2021: Moody’s

The uneven economic recovery in Asia and gradual unwinding of government support will also weigh on banks’ asset quality to some extent, through deteriorating debt repayment capabilities and rising default risks of weaker companies, according to a report by rating agency Moody’s. Though it maintains that default risk will be partially mitigated by loan restructuring and moratoriums, which will delay the recognition of new problem loans.

The report says that the low interest rate environment and elevated credit costs will put pressure on profitability in the banking sector.

While most rated nonfinancial companies in Asia will maintain solid access to funding, refinancing risks remain for lower-quality companies with weak liquidity, says the report.

Central banks will remain accommodative, but high uncertainty could delay long-term investment and consumption decisions.

“We expect global liquidity to remain abundant in 2021, and capital flows and dollar-funding costs likely will be less of a constraint in Asia as a whole in 2021 than in 2020. However, significant uncertainty around the region’s economic recovery could lead to sudden shifts in sentiment and induce highly unstable capital flows into the region, which could affect market access for companies with weaker liquidity,” says the report.

According to Moody’s, Asia is better positioned to absorb the ongoing economic shock of the COVID-19 pandemic in 2021 than are other regions, and this underlying strength of the region will continue to be supportive of credit quality.

However, the report maintains that the pandemic shock has increased the vulnerability of the region’s weaker credits, due to which the share of negative outlooks across the sovereign, banking and corporate sectors has increased for 2021.

“We are likely to see increased differentiation in credit quality arising from the economic trends, which will amplify vulnerabilities particularly for weaker debt issuers. Our share of negative outlooks across the sovereign, banking and corporate sectors has increased for 2021, with negative outlooks concentrated toward the lower end of the rating scale,” says the report.

The report predicts that the COVID-19 pandemic will accelerate a number of secular shifts that were already underway, with a number of credit implications for Asian debt issuers.

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First, ensuring supply security will now be a key priority for many governments and companies across the world. While trade diversification away from China as the global centre will benefit other Asian producers, some productive capacity may also move out of the region entirely. Second, as more activity shifts online, many governments in South and Southeast Asia will need to upgrade existing digital payment infrastructure and logistics. Third, the unequal effects of the pandemic on workers will widen social inequality and potentially lead to increased political polarization. Fourth, louder calls for healthcare services and infrastructure spending may increase fiscal challenges.