Michael Petit of Standard & Poor's reveals his outlook for sovereigns and corporates in Asia Pacific in 2012, including various opportunities and challenges for the region.
Date: Dec 2011
The region’s sovereigns and corporates have generally gone through the first part of the current global financial crisis (starting in late 2007) in relatively good shape, he said, with corporates largely managing to reduce their debt levels over the last 10 years, and many of them now being highly liquid.
The banking sector has also weathered the global crisis fairly well, plus most countries have posted solid growth, he added.
However, Asia Pacific is not decoupled from the rest of the world, so Petit said a major concern is what’s happening in the Eurozone, particularly in relation to the sovereign and banking sectors.
Biggest risks going forward
The risk from what’s happening in the rest of the world, said Petit, could materialise through either trade flows or capital flows – and in the real economy there is already an apparent slowdown in the western markets, in turn impacting the volume of exports from Asia.
As a result, further deterioration in US growth and the not-too-far-fetched downside scenario of recession in Europe will further weaken exports in Asia – which will lead to lower growth rates than those expected in the region.
On the capital flow side, the danger is that the already-high level of risk reversion in the global markets could become more pronounced, which would mean that the availability or cost of funding will be higher, he explained, in turn impacting a range of sectors – including those sovereigns which are fairly reliant on external funding.
Positive developments in Asia
The growth of the domestic debt capital markets in Asia has been very encouraging, said Petit.
For example, he said, countries like Malaysia have put in place a domestic capital market which is sophisticated and accounts for a substantial part of the funding needs of the country. Plus, around half of that market is Islamic finance, so there is a potentially broader pool of investors looking at the market.
Malaysia is what Petit calls the “poster child” in the region, but he added that Thailand is also developing a healthy domestic debt capital market.
The development of the offshore renminbi market is also interesting, said Petit, which is a global cross-border market and potentially a new source of financing for those entities with renminbi needs.
Encouraging further development
To encourage the continued development of domestic debt markets in Asia, which Petit said are still relatively shallow, there is a need in those markets for more liquidity. Yet that will take time in growing.
There is also a need for greater transparency and more active participants, he added.
Greater China ratings
According to Petit, Standard & Poor’s has launched its Greater China ratings scale based on exactly the same criteria, process and methodology as its global ratings. The only difference, he explained, is one of calibration.
He said the firm had seen a new brand of investors participating in this market, or potentially going to participate in this market, whose investable universe is limited to Greater China.
For them, therefore, it was important to put relative credit risk opinions in a context which is aligned with their expectations, so that the Greater China scale is anchored with a sovereign AAA, and it is possible to provide a greater level of granularity for the assets being rated on the Greater China scale.
