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Policy Stimulus can Bring Only Partial Relief in Credit Downturn: Moody’s

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In a yet another surprising analysis, Moody’s Investors Service stated that Asia’s policy response will cushion but not fully offset the economic and financial fallout from the coronavirus outbreak. Notwithstanding governments across the region are being swift in putting in place policies to support businesses and workers.

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, it said in sector in-depth report titled ‘Credit Risks in Turbulent Times.’

Sharply lower economic activity and fiscal expansion will be credit negative for sovereign credit profiles. Asia’s external and fiscal buffers are more robust which will provide most countries with greater space to deliver on policy easing.

“However, the coronavirus is exposing vulnerabilities and we expect policy space to be constrained for economies with existing fiscal challenges or elevated external vulnerabilities or both,” said Moody’s. 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.”

Countercyclical measures are unlikely to prevent deteriorating credit quality and, in some cases, outright defaults for smaller companies with weaker liquidity profiles, said Moody’s.

Asia’s banking systems will 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.

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,” said Moody’s.

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