Widespread access to funding across the credit spectrum is still a few months away for compes in South and Southeast Asia, according to S&P Global Ratings.
That is despite a broad-based recovery in GDP growth and profit growth for the corporate sector in the region, it said in a report.
Optimism is returning to South and Southeast Asia. S&P Global Ratings recently estimated that GDP growth in India will reach 11 per cent for the year ended March 31, 2022 compared with an 8 per cent decline for the year ended March 31.
Average GDP growth in Southeast Asia will reach 6.2 per cent in 2021 compared with a 4.3 per cent drop in 2020. S&P also projects a 5 to 15 per cent increase in EBITDA for rated compes in the region in 2021 over 2020, with profits growing year on year for nearly 90 per cent of them.
Yet, liquidity conditions remain tenuous for weaker rated issuers. Capital markets are likely to stay volatile for the rest of the year despite a recent fund-raising window for speculative-grade issuers.
S&P said bank lending is selective. Widely available liquidity is the missing piece necessary for a broader credit recovery in the region even as economies and profits rebound.
"Unpredictable access to capital and refinancing for weaker issuers in South and Southeast Asia is likely to create a spike in default rates if volatile funding conditions persist beyond the third quarter of 2021," said S&P Global Ratings credit analyst Xavier Jean.
With corporate ratings at B-minus or below for over 10 per cent of rated compes in South and Southeast Asia, default rates on the rated universe in the region could reach 5 per cent over the next 12 months. This is nearly twice the level of 2020.
S&P retained a negative outlook on about one-third of our ratings on issuers in South and Southeast Asia despite projections that profits will gradually recovering across most sectors and geographies in 2021 and 2022.
Nearly 60 per cent of the negative outlooks on speculative-grade issuers in the region are related to questions about liquidity and refinancing risk.
Hit or miss fund-raising initiatives suggest that improving investor sentiment toward speculative-grade issuers in South and Southeast Asia does not appear to be firmly entrenched, with market timing as much of a factor for a successful transaction as credit fundamentals.
"While capital market remain widely open and inexpensive to higher quality issuers, we think investor sentiment toward higher risk credits in South and Southeast Asia will only stabilise when the recovery is firmly under way, and when there is clear progress on a vaccination rollout. This remains slow in the region and could be a few quarters away," said Jean.
The report concludes that funding requirements are bound to grow for the corporate sector in South and Southeast Asia as revenue growth recovers and compes in the region rebuild their inventories.
More widespread working capital is an essential factor for a broader-based recovery. Its return will stabilise corporate credit conditions in South and Southeast Asia.
( With inputs from ANI )
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