Moody's: Fed tapering to increase credit differentiation in Asia

Moody's Investors Service says that while Fed tapering is unlikely to lead to an Asia-wide credit shock, there will be a greater differentiation in the credit performance of some individual countries and sectors.

Fed tapering -- the phased reduction of the US Federal Reserve's asset purchase program -- comes at a time when regional growth prospects are under the microscope, and this risks putting a damper on capital flows into Asia and a tightening of credit conditions.

The increase in borrowing costs will pose a cyclical challenge, but structural factors, such as low reliance on external funding, stabilizing corporate leverage and healthy banking system capitalization, mean that a region-wide credit shock is unlikely," says Rahul Ghosh, a Moody's Vice President and Senior Research Analyst.

"However, some individual countries and sectors will be more negatively affected than others, and as a result, we expect greater differentiation in their credit performance," adds Ghosh.

Ghosh was speaking on Moody's just-released special comment titled, "Fed Tapering Will Lead to Greater Credit Differentiation in Asia."

While Asian credit markets have managed to absorb the unwinding of the US Federal Reserve's asset purchase program so far in 2014, this publication looks at where the potential pressure points exist across the region should volatility spike once more.

In terms of the Asian sovereigns, the report states that Asian exporters with low external debt burdens, such as Singapore (Aaa stable), Hong Kong (Aa1 stable) and South Korea (Aa3 stable), are best placed to ride out weaker credit conditions and rising rates.

While narrowing current account deficits in the key externally funded economies of Indonesia (Baa3 stable) and India (Baa3 stable) will cushion the impact of tapering, capital flows are likely to remain volatile due to event-driven risk in the form of upcoming elections.

Moody's has also identified pockets of risk in the Indian and Indonesian high-yield corporate sectors due to the ramp-up in overseas borrowings and weakening domestic currencies in both countries.

High-yield Chinese corporates, mainly in the property sector, also rely on offshore funding and are exposed to tightening domestic credit conditions.

However, the prevalence of capital controls will limit the risk of a material deterioration in credit fundamentals caused solely by tapering.

In terms of the rapid growth in household credit in Southeast Asia economies -- most notably Thailand and Malaysia -- Moody's notes that its effects could weigh on banking sector performance in an environment of rising rates and weaker asset prices.

Finally, Fed tapering is seen to be credit positive for life insurers in Taiwan and South Korea, as companies will see higher investment yields from a rising rate environment.

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