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Fitch Wire

Global Home > Fitch Wire

Canada Growth Helps Debt Ratio Fall As Deficits Persist

Fitch has increased its real GDP growth forecasts for Canada to 1.9% in 2019 and 1.7% in 2020 in our latest Global Economic Outlook, from 1.6% and 1.4% respectively. Growth is decelerating, but the agreement to revise and replace NAFTA reduces uncertainty around trade, and consumption has proved relatively resilient. We have also slightly revised up our estimate of Canada's long-run growth potential.

Fall-Back Plans Ease 'No-Deal' Brexit Authorisation Risks for FIs

Interim solutions and contingency planning with respect to derivatives and insurance claims are reducing some significant risks a "no-deal" Brexit would present to the European financial services sector.

OPEC+ Supply Controls Are Key for Medium-Term Oil Prices

Changes to Fitch Ratings oil and gas price assumptions are modest, but we believe that supply controls will support medium-term oil prices in the range of USD60-USD65 a barrel for Brent crude. In the longer term, we continue to expect prices to fall below USD60/bbl driven by the falls to marginal producers' full-cycle costs.

2019 Outlook

Asia-Pacific Banks Running up Against Headwinds

Trade tensions, rising interest rates and slower economic growth in China remain key factors that could test banks' asset quality, while rising regulatory, compliance and accounting requirements could exert pressure on costs and challenge strategies in a number of markets.

China D-SIFI List Underlines Commitment to Contain Financial Risk

Stronger prudential requirements and oversight leading to improved risk buffers could have a positive impact on the standalone credit profiles of affected Fitch-rated entities. Support ratings may also potentially be affected by the final details of the D-SIFI list, and Fitch's assessment of the spirit and likely implementation of a resolution framework.

Higher Rates, Tighter Liquidity Threaten Some APAC Corporates

A number of Asia-Pacific (APAC) non-financial corporate issuers would face significant pressure on their financial profiles as well as potential refinancing risks in the event of a sharp rise in interest rates.

Hong Kong Bank Tailwinds Offset by Rising Competition

Hong Kong banks' earnings are likely to be supported over the medium term by strong volume growth, particularly in lending to mainland China, and higher interest rates. However, rising competition in the local market could largely offset these positive trends, particularly for smaller banks, while there is a risk that banks shift into higher-yielding assets to support their margins.

Joint Venture Dilution Could be Negative for China Automakers

The recent agreement to increase BMW's ownership of its Chinese joint venture (JV) with Brilliance is unlikely to become an industry norm, says Fitch Ratings. There is therefore no immediate rating impact on Dongfeng Motor Group (A/Stable) or Beijing Automotive Group Co (BAIC Group, BBB+/Stable). However, China is committed to opening up its auto industry and aims to remove the 50% foreign ownership cap on local vehicle manufacturing by 2022. A significant decline in either group's JV interest could have a negative impact on their credit profiles. 

China Bond Defaults to Rise in 2019 Despite Policy Easing

Chinese corporate bond defaults are likely to continue to rise in 2019 due to high refinancing pressures, the government's greater tolerance for defaults, and tight credit availability - despite the recent shift in the policy stance towards easing. Corporate defaults should remain concentrated in the private sector, which has benefitted less from policy easing than state-owned enterprises (SOEs) and local-government financing vehicles. 

Royal Commission Adds to Pressure on Australian Banks

Australian banks are likely to face additional profit pressure as a result of the Royal Commission's interim report into alleged misconduct in the financial sector. The findings should not affect bank credit ratings immediately, but could raise compliance and regulatory costs, lead to fines and legal class action and further slow credit growth. We maintain a negative outlook on the banking sector, which also reflects higher wholesale funding costs and rising loan-impairment charges.

China's Railway Push Relies on Local Government Funding

China's railway investment is set to speed up in 2H18 as part of efforts to support economic growth, with much of the funding borne by local government-related entities (LGREs). However, the railway drive will be much smaller than in previous easing cycles, with the fiscal capacity and leverage of local governments and their financing vehicles likely to be a more significant consideration in project selection than in the past.

Vietnam Banks Have Large Capital Needs Ahead of Basel II

The Vietnamese banking system could face a capital shortfall of almost USD20 billion (9% of GDP) to meet Basel II implementation, scheduled for 1 January 2020, and to increase allowance coverage to a level that reflects underlying asset-quality problems. Banks are likely to step up capital issuance over the next 18 months, which could improve the credit profiles of rated banks if it results in a meaningful and sustained increase in capitalisation.

Global Trade Tensions Add to APAC Bank Challenges

An escalation in global trade tensions could weaken the operating environment for banks in APAC by reducing demand for export finance, adding to credit risks for affected companies, and dragging on broader economic growth. Most banks are well-positioned to deal with effects that come through these channels, but could be more exposed if trade wars add significantly to market risks against the backdrop of global monetary tightening.
 

APAC Sovereign Credit Overview

APAC Sovereigns Face Rising External Challenges

The external environment facing Asia-Pacific economies is becoming more difficult, but is unlikely as yet to have a significant impact on sovereign credit profiles. Rising US interest rates and increasing global risk aversion towards emerging-market assets are generating capital outflows and exerting downward pressure on most Asian currencies, particularly the Indonesian rupiah and Indian rupee. Trade tensions between the US and China have added to market jitters and pose downside risks to growth. 

Korea's Budget May Add to Long-Term Fiscal Challenges

South Korea's (AA-/Stable) public finances can accommodate the short-term fiscal easing announced in the budget for 2019 last week, and the increase in spending may help to stimulate sluggish job creation. However, a further widening of the deficit out to 2022, as is now projected by the government, could put the government in a weaker position to address the long-term fiscal challenges posed by population ageing.

Carmakers Face High Costs, Hurdles Due to Diesel Issue

The Volkswagen diesel scandal has boosted regulatory scrutiny and heightened public awareness of diesel-related issues and the circumvention of emissions targets. Carmakers now face higher costs of vehicle recalls and fines, declining sales of diesel cars, and increasing capex and R&D costs to develop more fuel-efficient vehicles to meet tighter emission regulations.

China's Policy Easing to Stop Short of Credit Stimulus

China's recent measures to support the economy mark a shift in the policy stance towards easing and away from the previous singular focus on addressing financial risks, says Fitch Ratings. Easing is likely to stop short of the type of credit stimulus that could add significantly to economic imbalances, but this remains a risk that could have negative implications for the sovereign rating.

Negligible Rating Impact From Australia Leadership Change

The change in Australia's prime minister is unlikely to have a near-term credit impact for the sovereign, and there is no indication so far that the frequent leadership changes in recent years have undermined economic growth or the trajectory of public finances. Repeated bouts of political turmoil could, nevertheless, eventually weigh on business confidence, policy continuity, and the ability of the government to advance policy proposals that address medium-term challenges.

Turkish Insurers Hit by Weak Lira, MTPL Price Cap

Turkish life and non-life insurers' credit quality has deteriorated as a result of the country's macroeconomic instability and the large fall in the value of the Turkish lira. Motor insurers face added pressure from the cap on motor third-party liability (MTPL) insurance premiums. 

India Sovereign Credit Risk from Rupee Decline Is Limited

A recent sharp sell-off in the rupee illustrates India's sensitivity to shifts in market sentiment towards emerging markets, and suggests there could be further bouts of pressure as global monetary tightening progresses. However, the impact of currency weakness on India's sovereign credit profile is likely to be limited by relatively strong external finances, especially the low level of external debt. Currency depreciation could nevertheless add to existing pressures in the corporate and banking sectors.

External Finance Risks Constrain New Pakistan Government

Pakistan's incoming PTI-led coalition government, which took office this week, will be under immediate pressure to arrest the deterioration in external finances and address fiscal challenges, as well as to attract the external funding necessary to meet its financing gap, says Fitch Ratings. The new government has more political capital to take positive though difficult policy actions, but it has a thin majority in parliament and faces a strong opposition, which could complicate policymaking. 

Japanese Non-Life Premium Hike Won't Offset Headwinds

Japanese non-life insurers appear likely to raise premiums on their fire business from 2019, but the additional revenue is unlikely to offset the negative impact on profitability of the consumption tax hike scheduled for October 2019 and a cut in the statutory interest rate in April 2020, says Fitch Ratings. We expect these headwinds to push up the average combined ratio of large insurers by around 2 percentage points. 
 

Chinese Corporates Face Offshore Issuance Challenges

Offshore bond issuance by Chinese corporates has dropped sharply in recent months as a rise in defaults and the trade tensions with the US have undermined investor sentiment towards some Chinese issuers. The authorities' recent steps to alleviate some of the tightness in onshore credit conditions could help ease investor concerns over default risks, but access to the offshore market is still likely to be limited to stronger, established issuers during the rest of 2018.

High Oil Prices Give Fresh Vitality to EMEA HY E&P Sector

The recent oil price recovery, combined with the cost-cutting measures undertaken during 2016-2017, has given fresh vitality to high-yield exploration and production (E&P). 

Environmental Curbs to Keep China Steelmaker Margins High

China's restrictions on steel production are likely to ensure domestic steelmakers' margins remain high, and will continue to support global prices over the next 12 months, say Fitch Ratings and CRU. The restrictions will also temper steelmakers' capex, which, along with strong margins, should drive continued deleveraging in the sector. 

Tariff Risk to US, Chinese Corporates Limited But Rising

The vulnerability of rated corporates in the US and China to initial rounds of tariffs by those countries is limited, due to either low direct exposure or the relatively strong global economy. However, tit-for-tat retaliatory actions could raise credit risk and in rare cases cause rating actions where issuers are already under pressure. A prolonged trade dispute resulting in weaker GDP growth, higher inflation, increased currency volatility or rapid changes in commodity prices could have wider rating implications.  

Asia Frontier Bank Reforms Likely to Weigh on Growth

Asia's frontier markets are pushing ahead with banking sector reforms that should ultimately improve weak regulatory frameworks and strengthen banks' buffers against shocks. However, capital shortages, asset-quality problems and regulatory efforts to address these weaknesses are likely to constrain the growth of even stronger banks over the next two years.. 

Indonesia Mortgage Regs Support Property, Pose Bank Risks

Bank Indonesia's (BI) decision to remove the 15% downpayment requirement for mortgage loans on first homes from 1 August 2018 could support property developers, but is unlikely to fully offset headwinds for demand growth and could add to asset-quality risks in the banking sector. Smaller banks are likely to be more aggressive in taking advantage of the lower restrictions, in order to gain market share.

New Bond Rules Unlikely to Add to Chinese Developer Risks

New rules banning Chinese property companies from using proceeds from offshore bond issuance to invest in new projects appear to formalise a policy that had already been in place since the start of the year, and are unlikely to add significantly to the elevated funding risks that developers are already facing, says Fitch Ratings. 

Too Soon to Call China's RRR Cut a Clear Sign of Easing

China's two recent reserve requirement ratio (RRR) cuts amid slowing economic growth and rising trade risks have prompted market speculation that a new cycle of monetary easing is underway, but we believe it is too early to conclude recent policy actions mark a clear reversion in stance. 

Indonesian Bank Buffers Cushion Against Market Volatility

Indonesian banks are moderately vulnerable to possible market, credit and liquidity risks arising from US monetary tightening. However, the profitability and capitalisation of the large banks are strong enough to provide a cushion against the potential negative effects, according to a Stress Test. 
 

China Bank Reform Positive But Too Soon for Mass Upgrades

China's tightened regulatory stance has slowed the build-up in financial-sector risks and should help improve the financial system's overall stability. However, Fitch Ratings does not believe these measures have reduced risks meaningfully enough to warrant the type of sector-wide bank rating upgrades recently made by Moody's. 

China Slowdown Would Pressure Some US States

If a slowdown in China's economy led to a decline in US exports, several states with substantial agriculture exports and one with aircraft exports would likely see localized declines in economic activity and, thus, tax revenues, says Fitch Ratings. However, we would expect states with a high volume of imports from China would not be affected.

Korean Diplomacy Effort Has Scope to Ease Structural Risk

The summit meeting held this week between the US and North Korean leaders continues the de-escalation of tensions on the Korean peninsula; while the joint statement on denuclearisation, if followed through, could eventually allow the normalisation of North Korea's international relations and reduce the structural risks to South Korea's sovereign credit profile.

China's Tighter MMF Regulations Won't Halt Sector Growth

China's latest tightening of regulations on money market funds (MMF) is unlikely to slow sector growth significantly, but should lower liquidity risks marginally. One effect of the changes will be to discourage retail clients from viewing and using their MMF investments like bank deposits, but there will be only a limited impact on most investors, and, moreover, there is a lack of competing investment products for clients. 

Rising Competition to Pressure China's Big Three Airlines

The Chinese airline sector is likely to continue to grow strongly over the long term, supported by rising household incomes, infrastructure investment and market-oriented reforms that are driving improvements in airline efficiency and customer experience.

China's New Renewables Policy to Hit Solar Manufacturers

China's decision to replace the feed-in-tariff (FiT) mechanism with a bidding process for most new wind and solar power projects will lower tariffs and reduce the incentive for operators to increase capacity. The strongest impact will fall on producers of solar panel equipment, with solar capacity additions likely to decline sharply. 

Contacts

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Tatiana Kordyukova

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Dan Martin

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Carla Norfleet Taylor

Corporates

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David Prowse

Financial Institutions

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Robert Rowan

Public Finance, Structured Finance

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