Fed tapering to hit some more than others

Economy March 13, 2014 00:00

By The Nation

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WHILE FED tapering is unlikely to lead to an Asia-wide credit shock, there will be a greater differentiation in the credit performance of individual countries and sectors, according to Moody's Investors Service.

The phased reduction of the US Federal Reserve’s asset purchase programme comes as regional growth prospects are under the microscope, and this risks a dampening of capital flows into Asia and a tightening of credit conditions.

The rise in borrowing costs will pose a cyclical challenge, but structural factors, such as low reliance on external funding, stabilising corporate leverage and healthy banking system capitalisation, mean that a region-wide credit shock is unlikely, Rahul Ghosh, a senior Moody’s research analyst, said yesterday.

"However, some individual countries and sectors will be more negatively affected than others, and as a result, we expect greater differentiation in their credit performance," he said.

While Asian credit markets have managed to absorb the unwinding of the Fed’s quantitative easing so far this year, Moody’s looked at where the potential pressure points exist across the region should volatility spike once more.

The effects of the rapid growth in household credit in Southeast Asia economies, most notably Thailand and Malaysia, could weigh on banking-sector performance in an environment of rising interest rates and weaker asset prices.

In terms of Asian sovereigns, export-oriented economies with low external debt – such as Singapore ("Aaa stable"), Hong Kong ("Aa1 stable") and South Korea ("Aa3 stable") – are best placed to ride out weaker credit conditions and rising rates.

While narrowing current-account deficits in the key externally funded economies of Indonesia ("Baa3 stable") and India ("Baa3 stable") will cushion the impact of tapering, capital flows are likely to remain volatile because of event-driven risk in the form of upcoming elections.

Pockets of risk

Pockets of risk have been identified in the Indian and Indonesian high-yield corporate sectors because of the ramp-up in overseas borrowings and weakening domestic currencies in both countries.

High-yield Chinese corporations, mainly in the property industry, also rely on offshore funding and are exposed to tightening domestic credit conditions.

However, the prevalence of capital controls will limit the risk of a material deterioration in credit |fundamentals caused solely by tapering.

Fed tapering is seen to be cre-|dit-positive for life insurers in Taiwan and South Korea, as com-panies will see higher investment yields from a rising-interest-rate environment.