Asia-Pacific to see limited immediate impact from Brexit - S&P

HONG KONG - The direct real impact on Asia-Pacific economies from the UK's decision to leave the EU is likely to be limited, since the relevant linkages are weak, says S&P Global Ratings in a report published today. "Whether we get any measurable real impacts from Brexit depends on a couple of things,” the report says.

“One, on how long the market volatility lasts, and whether it begins to spill over to the real economy. And two, whether we get any political aftershocks, including EU exit/entry votes, from other European markets," said S&P Global Ratings' Asia-Pacific chief economist Paul Gruenwald.

“Brexit is expected to be challenging but is not likely to have widespread near-term negative rating consequences for home-grown Asia-Pacific banks and other financial institutions.

“Although, it's still early days as the geopolitical ramifications of Brexit are yet to fully play out, the direct exposures of most Asia-Pacific financial institutions to the UK appear to be manageable at current rating levels.

“Generally, our S&P Global Ratings' portfolio of rated corporates in Asia-Pacific has limited exposure to the U.K. market, except for CK Hutchison Holdings group, Tata Motors, and Tata Steel.

The rating impact on these companies will likely be neutral to somewhat negative if there is sustained weakness in economic output and heightened risk aversion. “

“For China's speculative-grade ('BB+' or lower) corporate issuers, US-dollar bond maturities look manageable due to their proactive refinancing.”

"The Japanese yen's status as a safe-haven currency could lift its value, which will likely have a direct negative impact on the overall earnings of companies with net export exposures," said S&P Global Ratings credit analyst Terry Chan.

"For Australian corporates, currency volatility will have only marginal impact. That's because most borrowers maintain a high level of currency hedging for non-Australian-dollar denominated debt and/or have protection through non-Australian dollar cash flows for offshore operations."

The report says UK insurers with operations in Asia-Pacific are likely to face some impact. The region's insurers, on the other hand, have limited business operations in the UK, with the exception of Australia’s QBE Insurance Group, some Japanese insurance groups, and reinsurers.

“Nevertheless, capital market and foreign exchange volatility will affect the region's insurance companies' investments.

“We see limited impact on sovereign credit support for most Asia-Pacific countries in the immediate aftermath of the British poll results. Political and other uncertainties, however, have turned investors more risk-averse and this has affected trading conditions negatively in many markets.
“Should the impact of these uncertainties persist, borrowers that depend on external financing could see funding costs and availability deteriorate.

“We don't expect Brexit to affect the ratings on Asia-Pacific structured finance transactions. Unemployment is a key driver of loss in structured finance transactions, and any direct impact of Brexit on employment conditions in Asia-Pacific economies is likely to be limited in the near term.”

"Brexit's market impact is likely to be significant in the near term, particularly in terms of stock market and currency volatility," said Chan.

"The medium-term impact on Asia-Pacific markets, however, is likely to be limited as investors make decisions based more on economic and financial fundamentals rather than just sentiment.

“If market volatility were to spike and prolong, we believe Asia-Pacific regulators are likely to take action, including extending short-term liquidity."  www.standadandpoors.com (ATI).