Asian credit fundamentals to hold up well

PETALING JAYA: Asian credit returns in 2024 are set to be driven more by global macro developments than local fundamentals, according to Standard Chartered Global Research.

“Our base-case scenario assumes a soft landing for the global economy. While this should lead to rate cuts by the US Federal Reserve (Fed), this has been largely factored into US Treasury yields already.

“We expect Asian credit fundamentals to hold up relatively well given decent growth and accommodative funding conditions in most markets.

“More importantly, we expect market technicals to improve due to continued negative net issuance and stabilising fund flows,” the research house said.

The research team said for this year, it expects Asia rating trends to have a negative bias, though they are unlikely to be as skewed as in 2022-2023.

Based on Moody’s rating distribution as of September 2023, 17% of rated Asian corporates were either on a negative outlook or on review for a downgrade, while only 4% were on a positive outlook or on review for an upgrade.

Corporate rating trends in Asia have been negative since the China property downturn started in the second half of 2021. Based on Moody’s data, in the first nine months of 2023, Asia saw 85 ratings downgrades and only 16 upgrades.

The downgrades were concentrated in China’s property and local government financing vehicles sectors. Other sectors which saw negative actions include China industrials and Indonesian property.

The research report said it expects default rates to decline in 2024. “Based on our data, 13 issuers defaulted in Asia in 2023.

Our list includes issuers who missed coupon and principal payments or undertook distressed exchanges and tenders for the first time, and excludes issuers (primarily in China property) who defaulted again after restructuring previously.

“While US$23.5bil of defaults in 2023 was a significant improvement from 2021-2022 levels, it still represented 11% of the principal amount of the Bloomberg Asia HY index at the start of the year (note that not all defaulted bonds were in the index).

“Defaults were again concentrated in the China property sector while three property credits in South-East Asia also undertook distressed tenders,” the research house added.

In 2024, it expects the default trends in Asia to improve. First, credit quality of the Asia corporate space has improved, with single-B and CCC issuers accounting for only 3.7% of the Asia index compared to 7.7% in end-2021.

Second, alternate funding channels in the form of onshore loans or offshore private credit has been available for a few stressed credits.

In China, growth may initially surprise on the upside given how negative expectations are, but the long-term debate about China’s equilibrium growth level is likely to continue, the research house noted.While authorities in China have taken multiple steps to support economic growth, the outlook for the world’s second-largest economy and a key driver of growth remains modest at best, it added.

“That said, we see a risk of a few more defaults in China property while some issuers could face idiosyncratic risks in the ex-China property space.

“Overall, we expect US$8bil to US$10bil of defaults in 2024; the number could be higher if China property credits continue to remain under stress,” the research housed said.