A strong US dollar will have credit effects on rated Asia Pacific companies, with those that have a significant portion of their debt and debt-servicing costs, or other costs, denominated in US dollars while earning revenues in depreciating currencies more vulnerable to the negative credit effects, said Moody’s recently.
Major APAC currencies have tumbled this year, as factors including the US Federal Reserve's monetary policy tightening, slowing global growth and geopolitical uncertainty drove a significant strengthening of the US dollar, the firm noted.
"Most rated companies in APAC have sufficient buffer to withstand a further weakening in their respective local currencies against the strong US dollar,” said Annalisa Di Chiara, a Moody's Senior Vice President. “A significant deterioration in cash flow generation and overall credit quality is therefore unlikely."
But risks remain for some, according to the credit rating agency.
In China, a weaker renminbi will add to companies' existing refinancing challenges of very restricted funding access in the offshore market, in particular property companies at the lower end of the rating scale, the firm said.
In Japan, the benefits of a weaker yen are diminishing as companies shift away from an export-driven business model, intensifying inflationary pressure and rising US dollar funding costs, Moody’s pointed out.
Elsewhere, four rated Indonesian companies are particularly exposed to a stronger dollar as they generate nearly all their revenue in rupiah but have significant US dollar-denominated debt or costs, according to the firm.
In India, natural hedges, some US dollar revenue and financial hedges, or a combination of these factors, help limit the adverse effects on cash flow and leverage for the rated portfolio, Moody’s added.
In Korea, many rated companies generate large US dollar revenue, net of US dollar costs, which more than offset the impact of won depreciation on their US dollar debt, Moody’s observed.
In addition, US dollar input costs will increase for companies like airlines and steel manufacturers in Australia, although many also hedge these foreign exchange exposures and can pass on some cost increases to consumers, Moody’s added.
