Do you expect economic conditions to aid Asia-Pacific ratings in 2013?
We believe downgrade pressure on our issuer credit ratings in the Asia-Pacific will continue in 2013. This is despite a likely pick-up in economic growth for the region. According to our forecasts, Asia-Pacific’s real GDP growth will likely improve slightly to 5% in 2013, from an estimated 4.7% in 2012. We expect China’s recovery from its economic slowdown to propel regional GDP expansion, offset by Japan reverting to low growth. In our view, China will record real GDP growth per annum of about 8.2% over the next two years.
Despite prospects for better economic times next year, we expect our rated pool of Asia-Pacific corporate, financial institution, and insurance entities to maintain a negative ratings bias. Difficult market conditions will mean that some sectors facing more ratings stress than others throughout 2013. The credit quality of rated Asia-Pacific corporate issuers has deteriorated slightly since the onset of the global financial crisis in 2008. Our pool of corporate ratings has averaged a drop of one notch at November 30, 2012, compared with the ratings levels at December 2008. For the region’s rated financial institutions and insurers, the decline has been less noticeable.
Which sectors are most susceptible to ratings pressure next year?
Issuers facing cyclical downturns will find conditions in 2013 most challenging. That would include those in the building materials, metals and minerals, real estate development, capital goods, and chemicals sectors. Issuers in other sectors facing some strain are those in consumer products and food, retailing, financial institutions, insurance, auto, and utilities. Slightly better placed are companies in transportation and infrastructure, high technology, gaming and media, and telecommunications. Meanwhile, issuers in real estate investment trusts, oil and gas, and project finance have a net neutral to slightly positive ratings bias.
A harder-than-expected China slowdown, contagion from the crisis in the eurozone, a double-dip recession in the US economy, and an oil-price shock could alter the situation. One or more of such adverse developments would intensify the stresses faced by Asia-Pacific companies, particularly those in the building materials, metals and minerals, real estate development, capital goods, and chemicals sectors.
Within our rated universe in Asia-Pacific, the percentage of net negative rating outlooks varies with each sector. At November 30, 2012, we found that the highest percentages of issuers in a sector with ratings on net negative outlooks or CreditWatch with negative implications are as follows (see table):
40% for the 15 issuers in building materials, forest products and packaging;
36% for the 36 in metals and minerals;
33% for the 60 in real estate development;
31% for the 13 in capital goods and machinery; and
29% for the 17 in chemicals
How will companies operating in the metals and mining sectors fare?
Our cautious view on the global metals and mining sector reflects the pricing pressures that have resulted from oversupply caused by this year’s still-sluggish global economic growth. We currently expect sluggish performance among steel and aluminium producers over the next year and see little impetus for improvement among coal producers. However, we believe credit trends will be more favourable for gold and copper miners.
We maintain our negative outlook on the steel sector in Asia. The oversupply of steel in China poses a significant risk to the regional steel sector and to producers of seaborne iron ore and met coal. However, we are seeing some signs of price stability and improved demand, which if sustained, could change our negative outlook to stable within the next quarter. Nevertheless, we believe steel prices will remain relatively weak globally in 2013, due to continuing economic weakness in Europe, and slower demand growth for steel in China resulting in global overcapacity.
For iron ore producers, we believe that prices could recover incrementally in 2013, when restocking activity starts in China with some improvements in global steel demand. We believe that iron ore prices need to average above $120 in the near term to alleviate potential negative rating pressure for certain producers, assuming other factors such as costs and currency-exchange rates remain the same. If prices were to remain around $100, we believe the credit quality of some companies we rate could be threatened, particularly those that are substantially debt-laden.
What is your credit outlook for the region’s main property sectors?
Our credit outlook for the 42 Asian Reits is largely stable, and these companies are firmly anchored in the investment-grade category. Their operating and financial trends are largely satisfactory, which are reflected in the fact that the majority of our rated entities have a stable outlook. Despite the short-term economic headwinds in the major Asian markets, the Reits maintain a well-spread leasing maturity profile and diverse tenant base, both of which reduce volatility in cyclical leasing markets. Our rated portfolio also contains a solid asset base that benefits from low vacancy rates and attractive rental space when compared with the whole market.
The credit outlook for the 32 Chinese property developers is still negative, but it has improved from six to 12 months ago. Housing prices continued to increase modestly in October 2012 — the fifth consecutive month of growth. Transaction volume stabilised following the recovery in second to third quarters. However, we maintain our negative bias because property sales have improved in 2012 from a low level. Out of 50 ratings that we have in this segment, 44% have a negative outlook, with the rest on stable outlook and one rating on CreditWatch positive. This is because the prospects for strong growth are limited as the economic outlook is subdued, which dampens purchasing power and investment sentiment. Moreover, the administrative control on property investment and speculative sales will continue to restrain housing prices. The financial strength of most developers may take time to recover due to weaker profitability as many have cut prices in the past 12 months to clear inventory while continuing to increase their borrowing, albeit at a slower rate, to fund expansion.
Terry Chan, the author of this article, is the Melbourne-based head of corporate research at Standard & Poor’s in Asia-Pacific.
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