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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. 

Chinese Deleveraging Would Test Some Emerging Markets

The slowdown in the Chinese economy that would be necessary to stabilise its corporate debt ratio over the medium term would have significant knock-on effects for the global economy. The economic effects would be strongest for emerging markets (EMs) with high commodity dependence or close Chinese trade links, while the sovereign credit impact would also depend on external and fiscal buffers, as well as the policy response.
Related: China Growth 1pp per Year Slower in Deleveraging Scenario

Special Report: APAC Banks

US Fed Hikes should be Manageable for Asia-Pacific Banks

Gradual, well-signalled US monetary tightening over the next few years should be manageable for most Asia-Pacific banks, but markets with higher dependence on foreign funding and external debt levels will be more vulnerable due to potentially higher market, credit and liquidity risks.

Bond Refinancing Risk Rising for Chinese Corporates

The recent rise in corporate bond defaults and credit events in China's onshore market is likely to continue during the rest of 2018, amid tightened credit conditions. Corporates that have over-stretched their balance sheets during the previous credit boom to fund aggressive business expansion and those which have uncompetitive or structurally ailing business models, will struggle to refinance their maturing debt this year. 

Malaysia Election Results Make Policy Shift More Likely

The surprise victory of the opposition Pakatan Harapan (PH) coalition in Malaysia's general elections held on 9 May means a much higher likelihood of fiscal and economic policy change. The PH won 113 of 222 parliamentary seats, resulting in Malaysia's first electoral transfer of power since independence in 1957. 

China Links Weaken Hong Kong Banks' Operating Environment

Fitch Ratings has cut its assessment of the operating environment for Hong Kong's banks to 'a'/stable from 'a+'/negative due to the growing influence of the links between the territory and mainland China. Click to watch the Bloomberg interview and listen to the RTHK interview.

Peer Review

Not All Philippine Banks Should be Rated the Same

Not all Philippines banks warrant the same ratings. The three largest banks would be more resilient to a downturn than their mid-tier counterparts, based on their stronger franchises, higher-quality portfolios and record of execution. These differences are reflected in our ratings, with the larger banks rated 'BBB-' while the mid-tier are one notch lower, at 'BB+'. 

Korea Summit Eases Tensions but Does Not Eliminate Risks

The summit meeting between the leaders of North and South Korea eases tensions on the peninsula, which have been elevated in recent months, but does not eliminate risks associated with the military stand-off, says Fitch Ratings. The process of normalizing relations is likely to be lengthy and unpredictable, even if begun in earnest. 

Housing Downturn Could Pressure Australian Bank Ratings

A stress test published today by Fitch Ratings shows that the mortgage portfolios of Australia's four major banks could withstand a significant housing market downturn without experiencing losses that - in isolation - threaten the banks' viability. However, ratings would be likely to come under pressure in severe scenarios where banks also suffer from large second-order economic effects, including a fall in consumer spending and higher losses from banks' business loan portfolios. 

APAC Banks' Property Risks are Mounting

Banks in Asia-Pacific (APAC) will face heightened property risks over the medium term, given their relatively high exposure to the sector and the susceptibility of heavily indebted household sectors to a rise in interest rates or unemployment. 

Foreign Carmakers Won't Give up China JVs on Rule Change

The Chinese authorities' decision to phase out the 50% foreign ownership limit on car manufacturers is unlikely to result in a significant change in joint-venture (JV) arrangements, which typically work well for both foreign brands and local partners. 

China RRR Cut Supports Bank Liquidity, Not Stance Change

The cut in China's required reserve ratio (RRR) is an example of the authorities using its array of policy tools to guard against liquidity shortages, particularly in prioritised sectors, as it continues its efforts to contain financial risks. We continue to believe the authorities' commitment to tackling risks could be tested if economic growth slows, but we do not interpret this RRR cut as a step toward more expansionary policy. 

TLAC Requirement on Nomura First Among D-SIFIs in APAC

The addition of Nomura Holdings (NHI) to the list of entities that must comply with total loss-absorbing capacity (TLAC) regulation marks the first time that an APAC regulator has specified TLAC requirements for a domestic systemically important financial institution (D-SIFI). 

Chinese Offshore Wind Growth Reflects Improved Returns

Growth in Chinese offshore wind power capacity has accelerated in recent years, reflecting lower costs and a relative improvement in tariffs compared with onshore wind power. The government's target of increasing offshore wind capacity to 5 gigawatts (GW) by 2020 is likely to be achieved at the rate of construction.

Indonesian Bank Pressures Easing in Improving Environment

The operating environment facing Indonesian banks is gradually improving, driven by steady economic performance, easing conditions in the commodity sector and macroeconomic policies consistently geared towards maintaining stability. These trends are helping to stabilise banks' asset quality, and could have positive rating implications for some Indonesian banks, if sustained. 

China Bank Results Reflect Pressure from Credit Migration

Reported asset quality of Chinese banks improved in the full-year results for 2017, reflecting an improvement in economic conditions and a shift toward retail lending where non-performance is generally lower. However, improvements in core capital were limited as the migration of non-loan or off-balance-sheet credit back into bank loans - driven by tight regulations on shadow-bank and financing activities - has consumed bank capital.

Investors Remain Positive on Indonesia Despite Risks

Attendees at Fitch Ratings' Indonesia Credit Briefing were generally optimistic about the outlook for Indonesia's economy - particularly prospects for the government's aggressive infrastructure drive. Domestic political turbulence was seen as the biggest threat by 62% of the 243 investors, analysts and business community members that attended. Polling results also suggested unease over external vulnerabilities amid rising US interest rates.

China's Rising Household Debt May Build Medium-Term Risks

The continued rapid rise of China's household debt burden could provide the authorities with more time to rein in corporate leverage without jeopardising growth targets, but would not resolve the economy's underlying reliance on credit and may create medium- to long-term risks of its own. 

China Can Cope With US Tariffs, But Trade Risks Rising

The US government's proposal to impose tariffs on USD50 billion-USD60 billion worth of imports from China is unlikely to have a significant impact on the Chinese or global economy.

CEMAC Zone Boosts External Buffer, Faces Fiscal Challenge

The regional central bank, BEAC, has taken a critical role in efforts to adapt to lower oil prices. A 50bp increase in the policy rate last year has contributed to lower imports, as has BEAC's move to stop providing financing to CEMAC member governments. 

Global Shadow Banking Sees Heightened Regulatory Scrutiny

Overall shadow-banking asset levels have remained manageable. However, more rapid growth in certain regions and activities is expected to attract additional regulatory scrutiny, given the potential indirect effects of market interconnectedness and/or asset price volatility on the overall financial system.

Dodd-Frank Easing Not a Near-Term Bank Ratings Issue

Regulators have already signaled willingness to ease or modify regulations for less-complex banks; we view robust regulation as supportive of bank creditworthiness, therefore, broad-based legislative deregulation could be negative for ratings depending on how banks respond. 

Belt-Road Bonds May Support Panda Market, Face Obstacles

New guidelines on the issuance of "Belt and Road" bonds on the Shanghai and Shenzhen stock exchanges may offer project developers better access to cheaper funding in China and could support development of the panda bond market. 

China's Latest Bank Regs May Support Debt Resolution

Chinese authorities' reported plans to relax provisioning requirements and broaden the scope of eligible capital instruments provide greater scope for banks to migrate non-loan and off-balance-sheet assets into loans. The lower provision requirement would also allow banks to accelerate loan impairment recognition. 

China NPC Shows High Growth Targets Still the Priority

China's National People's Congress, which opened this week, underscored a continued adherence to GDP growth targets, in line with building a "moderately prosperous society" by the 100-year anniversary of the Communist Party in 2021. Efforts to contain financial risks will also remain a focus, bolstered by the authorities' confidence in the strong growth momentum sustained over the past year.

APAC Record Offshore Issuance May Create Pockets of Risk

APAC non-financial corporates doubled their issuance of foreign-currency bonds to a record high of USD224 billion in 2017, and momentum is likely to remain strong in 2018. Strong recent issuance could add to isolated vulnerabilities in markets and sectors that have high FX exposure, but we do not believe offshore borrowing represents a systemic risk across the region.

Australia Leads the Way on 'Basel IV', Banks Well Placed

The Australian Prudential Regulation Authority (APRA) has continued to burnish its conservative credentials by being the first regulator to publish proposals to implement the Basel III endgame standard, also known as "Basel IV". 

New Indian NPL Framework to Raise Near-Term Bank Pressure

India's new framework aimed at speeding up non-performing loan (NPL) resolution is likely to push up banks' credit costs and undermine earnings in the near-term, reinforcing Fitch Ratings' negative banking sector outlook. 

Palm Oil Producers Adapting to Push For Sustainability

Palm oil producers will continue to face gradually rising pressure from consumers, regulators, investors and environmental groups to adopt sustainable operations, which is likely to drive a further increase in the share of certified sustainable palm oil (CSPO) in global output.

Wage Growth Key to Continued Success of Abenomics

Abenomics has supported the reflation of Japan's economy in the five years since it was launched, but is yet to have a significant impact on wage growth which has remained stagnant even as the labour market has tightened. A sustained improvement in nominal GDP growth could help ease the government's difficult fiscal consolidation challenge, but growth momentum is likely to falter in the absence of healthy wage gains.

Chilean Banks' Results Reflect Strong Credit Discipline

Stricter credit discipline is helping Chilean banks' earnings, with consolidated net income up 13.8% in 2017 despite the country's fourth consecutive year of economic slowdown. Increased revenues from wider net interest margins, higher fee income and local currency appreciation also helped, offsetting slow corporate and commercial loan growth and increases in taxes, loan-loss provisions and other costs.

Renewables Could Be Hurt By US Corporate Tax Reduction

The final version of the US tax bill removed most of the negative consequences for renewable projects, making the overall impact much less damaging to development of renewable energy than either the US House or the Senate versions. However, the reduction of the corporate tax will lower the value of renewables tax credits and depreciation that attracts investors.



Justin Patrie

Head of Fitch Wire

+1 646 582 4964


Mark Brown

Sovereigns, Structured Finance

+44 20 3530 1588


Laura Kaster

Financial Institutions

+1 646 582 4997


Tatiana Kordyukova


+44 20 3530 6151


Dan Martin

Corporates, Financial Institutions, Sovereigns

+65 6796 7232


Carla Norfleet Taylor


+1 312 368 3195


David Prowse

Financial Institutions

+44 20 3530 1250


Robert Rowan

Public Finance, Structured Finance

+1 212 908 9159