governments to use their balance sheets to support their economies and finan- cial sectors once again. And in our opinion, most governments would promptly oblige. But some of them con- tinue to bear the scars of the recent downturn—the fiscal capacities of Japan, India, Malaysia, Taiwan, and New Zealand have shrunk relative to
pre-2008 levels. If a renewed slowdown comes, it would likely create a deeper and more prolonged impact than the last one. The implications for sovereign creditworthiness in Asia-Pacific would likely be more negative than previously experienced, and a larger number of negative rating actions would follow.
We wait to see. CW
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Standard & Poor’s RatingsServices believes that in and ofitself, there is no immediate impact on Asia-Pacific corporate, financial institutions, project finance, or structured finance ratings resulting from the lowering of the issuer credit rating on the U.S. to ‘AA+’ on August 5. However, the U.S. rating change, together with the weakening sovereign creditworthiness in Europe, does point to dampened market sentiment, poten- tial rising funding costs in offshore markets, and reduction/reversal of cap- ital flows. Mitigating factors for the region include a still-positive economic growth outlook for Asia Pacific, together with generally strong domestic saving rates and healthy household and corporate sectors.
Sovereigns There is no immediate impact on Asia- Pacific sovereign ratings, although the potential longer-term consequences of a weaker financing environment, slower growth, and higher risk aversion are nega- tive factors.
Corporates & Infrastructure The direct impact on Asia Pacific’s cor- porate and infrastructure sectors is likely to be limited. However, a pro- longed market disruption—given the interconnectivity of the global mar- kets—would possibly result in increased spreads, reduced liquidity, and height- ened refinancing risks. This would most adversely impact highly leveraged enti- ties seeking rollover of debt or new funding. Having said that, a large
number of infrastructure companies, utility companies, and Chinese property developers have been taking active for- ward measures in their debt scheduling. Furthermore, significantly weaker U.S. demand would likely dampen senti- ment worldwide, and hence could place strong pressures on the profitability of large exporters from China, Korea, Japan, Singapore, and Hong Kong. Finally, the corporate sector would need to contend with fluctuations in exchange rates and sharp movements in input costs (higher spreads and com- modity price movements).
Financial Services In our opinion, the immediate effect on the Asia Pacific financial sector would, at worst, be a rise in spreads that would marginally raise the funding costs of the Australian, Korean, and Japanese banks that have some dependence on offshore funding markets. A sharp market reac- tion in Asia Pacific—especially if there is reduction/reversal in capital inflows from the U.S. and Europe—could impact a broader swathe of banks and insurers through declines in the market values of their investment assets (market-to-market accounting) and pressure on their capital market- dependent income. Credit quality of banks’ corporate loan books, especially the export sectors, could come under pressure if financing costs rise simulta- neously with declining revenue. The overall near-term impact could dent the sector’s profitability, but would unlikely inflict damage to balance sheets. We do not expect the market impact to be
severe enough to erode depositor confi- dence, which should sustain the retail deposit base that is the mainstay of funding for Asia Pacific’s banks. Given the still-positive economic growth prospects of Asia Pacific, the region’s healthy household and corporate sec- tors, and the generally sound financial profile of Asia Pacific’s financial institu- tions, we do not expect rating changes to result from this development.
Structured Finance The direct impact on Asia Pacific struc- tured finance markets is also likely to be limited, at this stage. While there is a small number of transactions that may have direct exposure to U.S. sovereign debt by way of collateral investments, it is relatively modest. The more likely rating impact would be through coun- terparty exposures to regional and global banks should they be affected by altered market conditions. Additionally, the potential impact of broader eco- nomic and liquidity access could indi- rectly impact structured finance ratings performance over time. CW
U.S. Downgrade Has No Immediate Impact On Asia-Pacific Ratings
Analytical Contacts: Elena Okorotchenko Singapore (65) 6239-6375
Takahira Ogawa Singapore (65) 6239-6342
KimEng Tan Singapore (65) 6239-6350
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Asia-Pacific
Analytical Contacts:
Ritesh Maheshwari Singapore (65) 6239-6308
JaeMin Kwon Hong Kong (852) 2533-3539
Andrew Palmer Melbourne (61) 3-9631-2052
Peter Eastham Melbourne (61) 3 9631 2056
For more articles on this topic search RatingsDirect with keyword:
Asia-Pacific