‘ Virus very serious threat to Asia’
As the coronavirus pandemic roils every industry around the world, Asia is under particular threat, according to a leading analyst.
The analyst said the region had led the world in economic growth for years, as debt helped fuel frenetic construction of airports, bridges and apartment towers for millions of people moving into cities.
That model is now running up against an unprecedented spike in borrowing costs, as investors who piled into the region’s riskiest debt at a record pace grow anxious.
“It’s all coming home to roost,” Charles Macgregor, a financial analyst and head of Asia at Lucror Analytics, a Singapore-based independent research firm. Bondholders are now racing to dump their positions after snapping up a world-beating 140 percent jump in junk-rated Asian dollar issues in 2019.
Spreads on junk bonds had soared to around the highest on record, according to data going back to 2010, new issuance had slowed to a trickle and analysts at Goldman Sachs Group Inc. are predicting defaults would rise.
The depth and breadth of the pain will depend on the path of the outbreak and government efforts to prevent economic depression, but some businesses are running out of time.
Money managers once seduced by high yields had lost their appetite for risk, he said. Since February 20, investors had withdrawn over $34 billion from corporate bond funds, according to the Institute of International Finance.
The current situation echoes the 1997 Asian Financial Crisis, when companies took on unprecedented levels of dollar-denominated debt, says Xavier Jean, senior director for corporate ratings at S&P Global Ratings.
The coronavirus pandemic is forcing companies to draw down credit lines and even brings fears of a protracted malaise that has some flavor of a depression. In an early warning sign of pain in Asia, Singapore’s economy contracted the most in a decade in the first quarter.
The credit market turmoil adds to risks for a region that again surpassed other areas with a 5.3-percent economic growth rate last year, but is now particularly vulnerable as travel bans and lockdowns crimp exports.
While domestic bond markets in Asia have become more robust and banking systems healthier, the corporate sector is still wobbly. In Indonesia and Thailand in particular, currencies have lost at least 7 percent against the dollar this year.
Firms are larger compared with the Asian financial crisis, but weaker as a lot of debt has built up, according to Raymond Chia, head of credit research for Asia excluding Japan at Schroder Investment Management.
Indonesia’s corporate debt is the most precarious. The currency is down a region-worst 14 percent this year and the local bond market is less robust than its neighbors’. In the past month, S&P has either downgraded or changed outlooks to negative for six Indonesian companies with $3.2 billion in total debt outstanding.