Corporate debt levels in the Asia-Pacific region have been climbing higher as interest rates have remained low, which could result in a greater level of defaults and therefore trouble for the region's banks if macroeconomic conditions worsen, according to a new report by Moody's Investors Service.
The credit rating agency said that Asian companies could face a more challenging operating environment over the course of 2019 and 2020 as trade tensions between the United States and China, combined with growing geopolitical risks, "weigh increasingly on the global economy and supply chains at a time when growth is already decelerating".
"Corporate default rates in Asia-Pacific have been low so far, helped by low interest rates and favourable financing conditions, but the intensifying trade and geopolitical tensions are weighing on the global economy and supply chains amid already slowing growth," Rebaca Tan, Moody's analyst, said.
The US and China have been embroiled in a trade war for more than a year as US President Donald Trump tries to force Beijing to change decades of trade and industrial policies, with both countries placing tariffs on hundreds of billions of dollars of each others' goods. The uncertainty over trade policy has eaten into business sentiment and caused executives to delay future investments, as well as a shift in the global supply chain away from China to other parts of Asia.
Moody's said that total corporate debt increased by 1 per cent last year in US-dollar terms in 13 Asia-Pacific economies, the slowest since the global financial crisis. However, total debt levels remain high relative to gross domestic product (GDP) in many Asia-Pacific economies, the rating agency said.
"A spike in corporate defaults would be credit negative for APAC banks, given most corporates in the region rely heavily on banks for funding," Moody's said.
The report came as rival agency Fitch Ratings said that profit at more than 3,500 companies listed on the Chinese mainland rose 0.5 per cent in the first six months of this year, the slowest first half since 2015.
"Property, consumer staples, and industrials delivered double-digit 1H19 revenue and profit growth, although profit growth moderated for property, and the industrial sector reported minor revenue deceleration as the slowdown in transportation was offset by engineering and construction companies' accelerated growth," Moody's said.
Consumer staples was the only sector in China that reported a "meaningful increase in profit growth", primarily because an outbreak of African swine fever pushed up food prices and benefited food ingredient makers, Fitch said.
S&P Global Ratings said that weaker earnings threaten to drive up corporate debt, with leverage growth outpacing earnings this year. Rated companies, which tend to be larger, should have improved earnings in 2019, but debt is still likely to increase at a rate faster than earnings growth, S&P said.
Asia-Pacific is the primary driver for weaker global earnings growth among unrated companies, primarily tied to the economic slowdown in China, S&P said.
"Corporate leverage is worsening in 2019 as debt rises faster than earnings for non-financial companies," S&P Global Ratings credit analyst Terry Chan said. "Very low global corporate profit growth [1 per cent] forewarns possible earnings and economic recessions."
In China, the volume of corporate debt was little changed in 2018 as Beijing pushed to reduce debt in the country, after it grew by 17 per cent in 2017, Moody's said.
The rating agency, however, noted that corporate debt relative to GDP was well above 100 per cent at the end of 2018 in China, Hong Kong, and Singapore. The high levels in Hong Kong and Singapore were partly because of their roles as trade and financing hubs for multinational and regional corporates, Moody's said.
"In 2019, however, as economic growth slows in China, the government's policy priorities have shifted toward sustaining growth and stability, with policies to rebalance the economy, such as deleveraging, becoming secondary. The People's Bank of China (PBOC) has been actively using monetary policy tools to ensure there is sufficient liquidity in the banking system," Moody's said.
"While the resumption of strong credit growth could lead highly leveraged corporates to chalk up even more debt, on balance, the PBOC has guided credit supply to segments that have been most affected by tighter liquidity conditions in shadow banking, particularly the private sector and small and micro enterprises.
"We expect the government will be cautious in stimulating the economy with large-scale credit extension as the economy's debt-carrying capacity is becoming increasingly constrained."
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