Pandemic to strain credit climate

Moody’s: Stimulus measures unlikely to prevent deteriorating credit quality

While governments and central banks across Asia-pacific scramble to ease the economic pain inflicted by the COVID-19 pandemic, debt watcher Moody’s Investors Service said all these policy measures would still fall short of shielding the private sector from the pandemic.

“Asia’s policy response will cushion but not fully offset the economic and financial fallout from the coronavirus outbreak,” Moody’s said in an April 21 report titled “Policy stimulus will provide companies and banks only partial relief in credit downturn.”

“Governments across the region have been swift in putting in place policies to support businesses and workers amid the coronavirus outbreak. These efforts will help mitigate credit-negative pressures on companies, banks and the broader economy, but they will not fully offset the economic and credit damage,” Moody’s said.

Moody’s said that while Asia’s external and fiscal buffers were more robust, which would provide most countries with greater space to deliver on policy easing, the COVID-19 pandemic had been “exposing vulnerabilities and we expect policy space to be constrained for economies with existing fiscal challenges or elevated external vulnerabilities, or both.”

“Policy stimulus will shore up credit quality for larger companies in the region’s strategically important sectors. Among industries that are most sensitive to the economic downturn, we expect government support to be forthcoming for larger companies in sectors with strategic economic importance, or which benefit from explicit government support, including airlines and oil and gas sectors,” it said.

It said countercyclical measures were unlikely to prevent deteriorating credit quality and, in some cases, outright defaults for smaller companies with weaker liquidity profiles.

As for banking systems across the region, Moody’s said they would face a much more difficult credit landscape.

“Weaker economic prospects and widespread financial market upheaval will translate into a more adverse credit landscape for the region’s banks in 2020 and 2021. Banking sector profitability will also decline as a result of higher loan-loss provisions related to deteriorating asset quality, lower net interest margins from lower policy rates and lower fee income on business activity,” Moody’s said.

“However, policy easing and liquidity injections by central banks will support banks’ access to funding and mitigate liquidity risks in the banking system. We also expect government support for larger, systemically important banks in the event of acute distress,” Moody’s added.

As of April 9, Moody’s overall banking sector outlook for the Philippines was negative, just like everyone else in the Asia-pacific region, except for Mongolia’s stable outlook.

Based on Moody’s latest assessment, the Philippine banking sector’s asset risk, operating environment as well as profitability and efficiency were deteriorating amid the COVID-19 crisis.

But for Moody’s, the domestic banking sector’s capital, funding and liquidity, and government support remained stable.