Policy, Global Growth Key Challenges for APAC Corporates, Says Fitch

Fitch Ratings has assigned a negative outlook to almost one-third of Asia-Pacific (APAC) corporate sectors for 2017.

Growth across Asia remains high by global standards, but has slowed in recent years, particularly in China. Meanwhile, external factors, such as the strong US dollar, weak global trade, and political uncertainty in the US and Europe, are presenting challenges.

Several sectors also face more specific difficulties, such as unfavorable policy changes, overcapacity and rising competition.

Fitch has published 46 sector outlook reports spanning its rated market sectors and countries across APAC. It assigned negative sector outlooks in 15 cases - the rest are on stable.

Policy moves

Policy moves were behind two of the more significant changes in our sector outlooks: Chinese homebuilders and Indian homebuilders.

Chinese homebuilders had the only positive sector outlook in APAC in 2016.

“We have revised it to neutral in 2017 to reflect policy intervention to clamp down on speculative and investment demand for residential properties. We expect China's housing sales to decline 15% in 2017, following record growth of around 40% in 10M16.

“We changed our sector outlook on Indian homebuilders to negative, from stable, after the authorities took steps in November 2016 to demonetize large-denomination bank notes,” notes Fitch.

One goal of demonetization is to curtail undeclared wealth, which will take its toll on home demand.

Residential property sales

Fitch expects residential property sales of most Indian homebuilders to weaken by at least 20%-30% this year.

Overcapacity is still a significant problem in a few sectors. China's government has set a target to reduce steel capacity by 14 million-27 million metric tonnes per year until 2020, but cuts will be difficult to achieve in 2017 and consumption is likely to remain steady.

Chinese steel exports are, therefore, likely to stay strong, and will contribute to global oversupply. India's government eased import pressure on Indian steelmakers by imposing minimum import prices last year, but capacity utilization remains low and rising production costs are adding to strains.

Overcapacity in thermal-coal market

Overcapacity in APAC's thermal-coal market suggests the recent coal-price rally is likely to prove unsustainable.

Fitch expects the slow recovery in oil prices to continue in 2017, and it has shifted its sector outlook on the APAC oil & gas sector to stable, from negative.

Fitch expects companies to start revising their capex strategies soon after two consecutive years of cuts that have held back production and reserves.

Increased capex positive for oilfield-services companies

Increased capex should be positive for oilfield-services companies, but their operating environment is unlikely to change significantly until 2018, given that overcapacity and poor day rates will continue to weigh on them for some time.

Some sectors face increased competition in an already-difficult growth environment.

Chinese retailers, for example, are losing customers to new shopping formats, particularly e-commerce, at a time when weakening consumer sentiment is affecting sales in a number of consumer categories.

New entrants into telecoms markets in India, Malaysia, and Singapore will put added pressure on incumbents that are already grappling with rising capex needs.

The proportion of APAC corporates assigned negative rating outlooks, Rating Watch Negative (RWN) or rated at/below 'CCC' had increased to 14% by end-2016, up slightly from 11% at end-2015, based on Fitch's publicly rated portfolio of 257 corporates.

Only 4% were on positive outlook or Rating Watch Positive (RWP).


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