The Nation



Asian growth may slow despite rosy Moody's report on corporate stability

Despite the prediction by Moody's that the outlook is "stable" for non-financial corporates in Asia ex-Japan, there is a real concern over slower growth prospects in Asia.

According to a recent report by Moody's, the recovering growth of gross domestic product in China, the United States and Europe along with manageable refinancing needs, solid liquidity for most rated corporates, and stabilising leverage will lead to an overall stable credit environment next year.

However, this expectation largely depends on the agency's calculation of corporates' rating trends. And while it may be true that 75 per cent of Asian corporate ratings have "stable" outlooks, what about the other 25 per cent and the countries that are currently experiencing slow growth?

There are many external factors that can decelerate the already slow growth of Asian corporates that largely depend on the giants of the global economy.

The European Union and the US are more important than China as sources of external demand for this region, and recovery in these economies will benefit Asia, but many Asian countries have been unable to exploit this opportunity.

According to Moody's, the US Federal Reserve's tapering of its quantitative easing next year will reduce near-term growth prospects of emerging economies and cause growth rates in most large Asian economies to be slower than in the past.

QE tapering will also result in further currency volatility, and this will put pressure on those economies with the largest external financing needs, such as India and Indonesia, while an abrupt rise in interest rates would affect highly leveraged companies.

A scenario of 10-year US Treasury yields moving suddenly to 5 per cent is also seen by Moody's as a possibility, and if that happened, it would have a disproportionate effect on major emerging economies by driving up borrowing costs, particularly in parts of Southeast Asia and India.

Moody's reported that rebalancing and reform had led to slower growth in China.

This has already had an adverse impact on the growth of commodity exporters, including Australia and Indonesia.

Moody's "stable" outlook for China could also go south if that country's GDP growth declined towards 5-6 per cent in the next 12 months. If that happened, it would lead to sharp declines in prices of commodities and metals while furthering the significant overcapacity in many Chinese industries. China would stop buying, and this would aggravate the already poor export performance in many emerging markets.

Rising interest rates across Asia are another factor that can influence the growth of Asian countries, since higher lending rates would tighten market liquidity and further depress domestic demand in core regions and sectors while weakening funding sources and exposing asset bubbles.

At the same time, if spending drops because people are encouraged by higher interest rates to save their money, domestic consumption will decline, and any hope of expanding the domestic market will have to be shelved until the rates come down.

Thailand is an emerging market that depends largely on exports, which means what happens to the giant economies will certainly affect the economy here. A slow recovery of the EU and the US and China's policy to slow down its growth rate would have a huge impact on the export sector in Thailand.

QE tapering and other US monetary and financial measures next year will raise borrowing costs, and that will affect many countries outside the United States itself, including Thailand.

Meanwhile prices of commodities such as coal, natural gas, oil and palm oil are expected to skyrocket next year, and countries that have to import most of their energy will certainly experience rising production costs.

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