Will overall debt in Asia-Pacific grow at a faster clip in 2018?
We expect total debt for the Asia-Pacific to expand by 8.4% in 2018, slightly faster than our estimated 7.5% credit growth rate for 2017. This is based on improved borrower and investor sentiment about economic prospects. Our projections put corporate and household debt growth at 10.5% and 10.0% respectively in 2018, and general government at 5.6%. We anticipate that the region's total debt in 2018 will reach US$67.4 trillion (2017 constant US dollars).
Will China again lead the pack, in terms of debt growth?
For individual countries (in local currency terms), we see China's total debt growing fastest in 2018 at 13.4%, followed by the Philippines at 11.0%, Mongolia at 9.4%, and Indonesia at 8.1%. China's increase in absolute debt will be led by borrowing from companies, then households, and lastly government. In the Philippines, companies will also contribute the most to absolute debt accumulation, but households will play a relatively smaller role, coming behind government.
Are you concerned about these faster growth rates?
Naturally, the region's debt growth is not without risk. We are expecting slightly higher ratios for banks' nonperforming assets. Of particular concern, is the borrowing trends of Chinese corporates, including government-related entities. On average, our rated Chinese companies have significant to aggressive financial risk (the fourth and fifth of our six leverage risk categories) on a stand-alone basis.
Is the outlook for economies in Asia-Pacific looking brighter?
Yes. Asia-Pacific is ending 2017 on a positive note, backed by an improving macro outlook. The region's two largest economies continue to post solid growth, although sustainability is a concern in China and weak domestic demand in Japan. A wide swathe of economies including the Tigers (Hong Kong, Singapore, South Korea and Taiwan) plus Japan, Malaysia, and Thailand have benefitted from a boom in electronics export volumes and prices in recent quarters. The region's risk profile has also improved. The odds of a US-China trade confrontation have fallen following a visit to the region by US President Donald Trump, but geopolitical risks surrounding North Korea's nuclear buildup remain elevated in light of missile launches by Pyongyang.
What’s the 2018 outlook for credit conditions in Asia-Pacific?
Credit conditions in Asia-Pacific are better going into 2018 than they were in 2017. That's because market concerns in late 2016 largely failed to manifest in 2017. Indeed, a year ago markets feared a higher US federal deficit, accelerated inflation, increased interest rates and spreads, and a stronger US dollar on the back of the US presidential election outcome in November 2016. Other market worries included more protectionist US trade policies and commodity prices holding at weak levels. In late 2017, however, these worries have largely abated, leading to greater business and investor confidence.
For 2018, the uptrend is likely to continue. S&P Global Ratings expects global economies to generally pick up and Asia-Pacific countries, especially China, to continue expanding their GDPs. What's more, the domestic and cross-border financing environment is still favorable--albeit with some tightening--indicating improving credit conditions than those a year ago.
Are tail risks for Asia-Pacific receding?
No. Conflict (North Korea), political, and trade (Trump) risks, while ebbing and flowing, remain. Meanwhile, China's debt and the region's asset prices continue to climb. Taken together, the risk of investors pulling back liquidity, particularly from the region's emerging markets, is still building up.
We regard the region's top credit-related risks are asset repricing; China's debt overhang; a liquidity pullback; and conflict, political, and trade risks.
Why is asset repricing a top risk?
The adoption of record low interest rates in US, eurozone, and Japan's central bank's policy have flooded the markets with cheap credit, fueling a strong bull run and record valuations in asset classes across many markets. As the hunt for yield frenzy in this low-volatility environment intensifies, investors have developed a stronger risk appetite in seeking out stakes in nontraditional asset classes with unproven track records.
As a result, the potential for sharp corrections in asset prices has become a significant risk scenario. For instance, if markets overreact to the US Federal Reserve's unwinding of quantitative easing, such a correction could occur. While our baseline is for well-telegraphed moves by major central banks and an orderly correction, risks are increasing of markets overshooting (e.g. in risk premiums) in reaction to surprise developments, spiking asset prices and interest rate adjustments.
Is China’s debt overhang problem likely to go away?
No. China's blistering debt growth since 2009 has diminished systemic financial stability to some extent. Although credit expansion had contributed to China's strong real GDP growth and higher asset prices, debt rose faster than national income growth. In particular, Chinese corporate debt poses a high risk, although its growth appears to have moderated. While household debt continues to spike, the household sector is not currently stressed. Our base case considers China's banking sector has sufficient strength to absorb likely losses.
The Chinese government's recent intensified efforts to rein in corporate leverage could stabilize the country's financial risk trend over the next two-to-three years. Nevertheless, we foresee the pace of credit growth over the next two-to-three years will increase financial stress gradually. Two downside risks remain: reacceleration of credit growth or a disorderly deceleration. Either scenario could undermine market confidence and loan performance, heightening volatility and liquidity stress that could spill over to other emerging markets.
Is liquidity pullback inevitable?
Yes. Low-volatility, high-liquidity conditions in recent years appear to have desensitized market participants to surprise developments. Indeed, Asian bond yields have trended down over the past decade, indicating ease of access to funds, although there has been an uptick in recent months. This implies a higher threshold of pain and consequence. While the specific trigger of a market pullback is uncertain, a liquidity withdrawal is inevitable given the near decade-long era of easy money.
Less-developed markets are vulnerable, particularly those that are more reliant on external funding. Credit spreads and currency rates would become more volatile as a result. Compounding this risk is a heightened refinancing need. We expect $1.1 trillion of rated financial and corporate debt in Asia to mature through 2022. Much of the debt has tight spreads and some have put options (e.g. China). The dominance of bank lending for regional corporate borrowing helps mitigates refinancing risk. Still, a severe weakening in economic growth or credit could cause banks to tighten loan supply.
Has the overall outlook for credit quality for issuers in Asia-Pacific worsened?
No. The net outlook bias on the Asia-Pacific pool of issuers we rate has halved to negative 7% as of Oct. 31, 2017, from negative 15% a year earlier. China's stabilizing GDP, firmer commodity prices, and higher capital expenditure have improved the net negative bias for the Asia-Pacific issuer pool. That said, competition for the consumer dollar is placing some stress on airlines, consumer products, and retail players. Meanwhile, the lagged effect from low returns on credit extended in recent years is pressuring banks and, to a much lesser extent, insurers.
(For more research and multimedia on S&P Global Ratings’ 2018 outlook for issuers, markets and economies across Asia-Pacific, please visit this dedicated webpage)
The article is authored by Terry Chan, managing director at S&P Global Ratings