Potentially higher interest costs and volatile foreign exchange rates represent the top credit risks for Asia-Pacific going into 2017.
The S&P Global Ratings annual year-end publication, titled Asia-Pacific Credit Outlook 2017: Trump, Growth, And Risks, outlines the ratings agency’s view of what lies ahead for the region's economies, markets and credit conditions.
It includes recent uncertainty about the policies of President-elect Donald Trump's future administration that is dominating financial markets. Rising US stock markets, a sell-off in global debt markets and the significant strengthening of the US dollar show that markets are already testing a scenario that incorporates key features of Trump's campaign: fiscal stimulus through increased infrastructure spending and tax cuts, rising inflation and a tightening monetary policy. According to S&P, the latter two may lead to higher interest rates.
"In Asia-Pacific, investors are in particular concerned about the trade policy the future US government may adopt. Such a ‘what if’ scenario may hurt Asia-Pacific's auto, consumer goods, infrastructure and technology sectors the most," S&P Global Ratings credit analyst Terry Chan said.
Notwithstanding the uncertainty, Asia-Pacific's economic growth appears to be steadying, according to S&P.
“Although headline growth rates haven't moved much of late, a reasonably firm pick-up in macro momentum indicators is occurring. Retail sales offer the clearest sign of a pick-up – it is currently above trend in most economies. This stems from rising incomes, which, in turn, is part of the region's evolving growth dynamics, with consumption playing a larger role,” S&P said.
Apart from higher interest rates and volatile currencies, S&P’s Mr Chan said other key risks include China's corporate debt, corporate refinancing, trade tensions, property markets and commodity prices.
“As for financing conditions, the recent global sell-off in bonds has not fully transmitted to local credit spreads, although the effect may be lagging. With economies still adjusting, the negative momentum in credit quality is likely to continue,” he said.