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Weakness Continues in Asia-Pacific Despite Easier Financing; Eyes Remain on China

Credit trends in Asia-Pacific continued to be less favorable in the third quarter of 2016 with a net negative rating bias continuing as a result of the lag effect from the region's economic slowdown. However, financing and debt capital market conditions have generally stabilized and have swung back to life after volatile market conditions over the previous quarters.

S&P Global Ratings expects the negative momentum in Asia-Pacific's credit quality to continue in the remainder of 2016 in terms of rating downgrades and defaults because of the ongoing rebalancing of China's economy and commodity prices. In fact, the negative bias on Asia-Pacific issuers moved up to 13% in August 2016, from 11% in May 2016, despite recent rating downgrades, indicating that rating transition risk remains.

Downgrades continue to dominate rating actions in the region in 2016, with 1.4 downgrades for every upgrade. Australia, Japan, China, and India accounted for the majority of downgrades, while upgrades were concentrated in the Republic of Korea.

Overview

  • Net negative sector outlook bias across Asia-Pacific moved up to 13% in August 2016, from 11% in May 2016
  • Globally, our key credit risks drivers are elevated, with trends varying from stable to increasing.
  • Financing conditions have stabilized in the third quarter, but investors and lenders remain watchful.
  • On the economic front, the macro picture across the region is largely unchanged in the quarter. We continue to see the balance of risks as being on the downside, and mostly centered on China, which may take time to play out.

On the economic front, the overall Asia-Pacific macro story is not bad, in particular given what is happening in the rest of the world. We continue to expect reasonably modest growth, little inflation, and a healthy level of services activity, including trade, relating to the ongoing rise of the middle class.

The macroeconomic picture across Asia-Pacific saw no big changes in the third quarter of 2016. India continues to shine and Japan wobbled again, although the authorities continued to ease monetary policies to boost inflation.

China was strangely silent over the past three months in term of market volatility and policy announcements. Given the amount of discussion about the country's unsustainable growth path, and the amount of market jitters generated over the past year, it is hard to say whether this is good or bad. The one sure thing, in our view, is that the medium-term term challenges to get the balance right in the Chinese economy are not yet being adequately addressed. In terms of the growth forecasts and risks, we are broadly unchanged from the last quarter. China's growth forecast has been nudged up marginally and the baseline elsewhere is largely unchanged. We see some downside risks to our Japan forecasts.

Regional Credit Trends: Weakness Continues

In our view, near-term credit risks in Asia-Pacific are mixed, with the lag effect of the region's economic slowdown translating to a worsening in the net outlook bias for the pool of Asia-Pacific issuers S&P Global Ratings rates. More specifically, the continued slowdown of China's economy and recent revisions in the ratings outlooks of several sovereigns have contributed to the worsening.

Over the three months to August 2016, the net ratings outlook bias has weakened to -13% in August (see table 1) from -11% in May 2016, indicating a rising likelihood of rating transition. The average rating of the Asia-Pacific pool remains 'BBB+'.