Tag Archives: Fitch

APAC Corps to recover in 2021, but cash flow weaker than 2019

Newsroom24x7 Network

Sydney/Singapore: Fitch Ratings expects corporate issuers in APAC to continue to stage a gradual recovery in 2021. Nevertheless, Fitch expect aggregate 2021 revenue for their portfolio of 330 publicly rated Asia Pacific corporates to be 7% lower, and 2021 EBITDA 15% lower, than their pre-coronavirus forecasts.

Fitch has underscored pandemic-related factors contributed predominantly to 73 downgrades during 2020, exceeding 19 upgrades by 4x. Downgrades peaked at 31 during 2Q, but fell back during 3Q and 4Q. Liquidity issues and sector-wide market changes remain the two leading factors behind the downgrades, and illustrate two of the main areas in which the pandemic is pressuring ratings.

The proportion of APAC corporates where Fitch have a negative outlook, rating watch negative (RWN) or ‘CCC+’ and below rating fell back to 18% in 4Q20 from 22% in 2Q20, but still well above 4Q19’s 11%. Pandemic-related negative rating actions, according to Fitch are likely to continue during 2021, but at a much slower pace. At the same time, September 2020 marked the start of subsequent positive rating actions – reflecting the stabilisation, if not improvement, in operating conditions in the region.

Fitch has now published 13 sector-specific 2021 Outlook Reports for APAC Corporates. They have a negative sector outlook on one sector (Asian Palm Oil), an improving sector outlook on six sectors (Autos, Oil & Gas, Gaming, Indonesian Homebuilders, Indonesian State-Owned Construction, and Indonesian Coal), and a stable sector outlook on six sectors (Telecoms, Technology, Utilities, China Engineering and Construction, China Homebuilding and China Steel).

US-China Trade War Escalation Could Knock 0.4pp Off World GDP by 2020: Fitch Ratings

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The imposition by the US of 25% tariffs on the remaining USD300 billion of imports from China would reduce world economic output by 0.4pp in 2020, Fitch Ratings says. Global GDP growth would slow to 2.7% this year and 2.4% next year, compared with our latest “Global Economic Outlook” baseline forecasts of 2.8% and 2.7% respectively. China’s growth rate would be reduced by 0.6pp, and US growth by 0.4pp, in 2020.

The imposition of tariffs on all imports from China being considered by the US administration would mark a significant escalation of trade tensions. It would see the US levy tariffs on an additional USD300 billion worth of goods. Presidents Trump and Xi both said last week that trade talks would resume at the upcoming G-20 meeting, where they planned to meet in person.

Fitch’s economics team has assessed a scenario in which the US imposes import tariffs at 25% on USD300 billion of goods from China and China retaliates by imposing a 25% tariff on USD20 billion of US imports untouched by the trade war so far, and by raising the tariff rate on USD100 billion of US imports already subject to new tariffs to 50%. The scenario also assumes that China cuts interest rates by 50bp and allows the CNY to depreciate by 5% relative to our baseline. The Fed responds by cutting rates. Our analysis used the Oxford Economics Global Economic Model – a global macroeconomic model taking into account trade and financial linkages between economies.

For China and the US, the tariffs would initially feed through to lower export volumes and higher import prices, with the latter raising firms’ costs and reducing real wages. Business confidence and equity prices would also be dampened, further weighing on business investment and reducing consumption through a wealth effect. Over the long run, the model factors in productivity being affected as local firms are less exposed to international competition and so would face fewer incentives to seek efficiency gains. Export competitiveness in the countries subject to tariffs would decline, resulting in lower export volumes.

The negative growth effects from lower export demand would be magnified by multiplier impacts on upstream supplier industries and from lower incomes in the export sector. These effects would spill over to other trading partners not directly targeted by the tariffs. Import substitution would offset some of the growth shock in the countries imposing import tariffs.

Global growth would fall even allowing for the monetary policy easing response. While falling short of a global recession, this would be the weakest global growth rate since 2009 and slightly worse than 2012, when the eurozone sovereign debt crisis was at its peak.

Countries not directly involved in the trade war would also see their GDP falling below baseline, though in most cases by less than the US and China. Korea would be the most severely hit, with GDP more than 1pp below baseline in 2020. Net commodity exporters such as Russia and Brazil would be affected, as slower world growth would push oil and hard commodity prices down.

Except in China, this trade war scenario would ultimately be deflationary as lower growth and hard commodity prices would curtail inflation. In the US, inflation would increase relative to the baseline in the year following the tariff hike. However, further out, slower growth, lower commodity prices and a stronger exchange rate would dampen price rises. Only in China would inflation remain above baseline for longer, because of the effect of a weaker exchange rate on import prices.

Indian GDP growth to hold up in FY21

Newsroom24x7 Business Desk

Mumbai: While Fitch Ratings have cut their growth forecasts for the next fiscal year (FY20, ending in March 2020) on weaker-than-expected momentum, they still see Indian GDP growth to hold up reasonably well, at 6.8%, followed by 7.1% in FY21.

The RBI has adopted a more dovish monetary policy stance and cut interest rates by 25bp at its February 2019 meeting, a move supported by steadily decelerating headline inflation. In this backdrop, Fitch have changed their rate outlook and they now expect another 25bp cut in 2019, amid protracted below target inflation and easier global monetary conditions than previously envisaged. On the fiscal side, the budget for FY20 plans to increase cash transfers for farmers.

Our benign oil price outlook and expectations of accelerating food prices in the coming months should support rural households’ income and consumption, Fitch point out.

Fitch Ratings: RBI Governor resignation highlights risks to policy priorities

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Hong Kong/Singapore: The resignation of the Reserve Bank of India (RBI) governor on 11 December follows a period of government pressure on the central bank to spur economic growth, and highlights risks to the RBI’s policy priorities, says Fitch Ratings. The RBI’s efforts to address bad loan problems have the potential to improve banking-sector health over the long term and its commitment to inflation targeting has supported a more stable macroeconomic environment in recent years. Increased government influence on the central bank could undermine this progress.

The full implications of Urjit Patel’s resignation will only become clearer once there is some indication of the RBI’s policy approach under his replacement, Shaktikanta Das, an experienced government bureaucrat. The central bank’s stance may still remain unchanged. Mr Patel cited personal reasons for leaving the RBI, rather than government interference. Moreover, there was no obvious break in policy continuity after the last governor, Raghuram Rajan, decided not to seek a second term in 2016, which also sparked market concerns.

Nevertheless, Mr Patel’s decision comes after months of escalating government pressure on the RBI to ease some of the strains created by its clean-up of the banking sector. Increased bad loan recognition has led to large credit costs – particularly for state banks – and weaker capitalisation in recent years. Capital constraints have, in turn, held back lending, while 11 state banks have fallen under the RBI’s “prompt corrective action” (PCA) framework, which allows the central bank to directly restrict their lending. Problems in the non-bank financial sector following the recent default of Infrastructure Leasing & Financial Services (IL&FS) have further reduced credit availability.

The government has unsuccessfully pushed the RBI to relax the PCA thresholds to allow some troubled banks to step up lending. Calls to dilute provisions in a new regulatory NPL framework that has accelerated bad loan recognition this year and to provide emergency liquidity to non-bank financial institutions (NBFIs) have also been dismissed. The introduction of a 0.625% counter-cyclical buffer (CCB) that was set to kick in from April 2019 has been delayed, but the RBI has so far resisted pressure to push back the implementation of other Basel III minimum capital requirements.

A roll-back of measures that address long-standing bad-loan problems and restrict the growth of weakly capitalised banks could have a negative impact on the credit profiles of affected banks and increase risks in the financial system. Most state banks are in a poor position to ramp up lending, with their common equity Tier 1 ratios well below the 7.375% that will apply from April 2019 under Basel III implementation. Some banks are also likely to continue reporting losses, further adding to capitalisation challenges.

In terms of monetary policy, the establishment of a Monetary Policy Committee (MPC) in October 2016 and recent introduction of inflation targeting has underpinned our view that the RBI’s macroeconomic policy framework is credible and effective. However, that assessment could change if government influence pushes the RBI away from its mandate. We affirmed India’s ‘BBB-‘ sovereign rating with a Stable Outlook in November.

General elections due by May 2019 will create a political incentive for the government to push for more supportive RBI policies. India’s economy remains one the fastest-growing in the world, but GDP growth slowed to 7.1% yoy in 3Q18 (calendar year), from 8.2% in the previous quarter. We recently lowered our growth forecast for the fiscal year ending March 2019 to 7.2% from 7.8%, due to the weak data, higher financing cost and reduced credit availability.