Asia sovereign credit risk is improving

Asia sovereign credit risk is improving

HONG KONG (Reuters): Asian sovereign credit risk is declining as many countries show improvements in their external positions, but the outlook for banks and companies remains murky, analysts said on Friday.

"What we are seeing in many Asian countries is a decline in imports and varying success in exports...and the result is a dramatic transformation of the external positions of these countries," said David Marshall, managing director of financial institutions for rating agency Fitch IBCA.

"That really transforms the analysis of the sovereign balance sheets, making them much healthier," he said.

It's a different story for banks and corporations, however, because it takes much longer for these to restructure and recapitalize.

"What holds back the banks and the corporates is this restructuring, the re-establishment of a healthy banking system and corporates slimming down by selling assets to improve financial performance," said Marshall.

The report card in terms of Asian bank restructuring is mixed.

For example, South Korea has received high marks recently following the government's decision to sell a 51 percent stake in Korea First Bank to a foreign private investor. Analysts also have given Thailand and Malaysia acceptable grades, while Indonesia is seen as lagging.

But in even in those countries where restructuring is progressing smoothly, the process is expected to take a long time, possibly years.

With this in mind, many fixed-income investors that are willing to take a bet on Asia nevertheless prefer to stick with sovereign credits.

"Corporate credit issuance is going to be very difficult," said Paul Marshall, credit analyst at Barclays Capital. "Investors will be saying, why should I move down the credit spectrum when there is so many sovereign credits that can be picked up?"

In December, China launched a US$1 billion sovereign bond issue that attracted good demand, particularly in Asia. The Philippines earlier this week sold US$1.0 billion in bonds, with U.S. investors taking a significant portion.

Thailand also is expected to tap international bond markets sometime this year, although Finance Minister Tarrin Nimmanahaeminda said on December 17 the government had no pressing need to issue bonds.

Korean quasi-sovereign companies, which received a boost when Standard and Poor's Corp raised the rating outlooks of quasi- sovereigns Export-Import Bank of Korea and Korea Development Bank to positive from stable along with the sovereign, also were deemed likely to access international capital markets in 1999.

Meanwhile, easier interest rates have helped boost domestic liquidity in a number of Asian countries, helping local financial institutions and potentially improving prospects for new bank lending.

But banks have become more cautious regarding credit risk since the start of Asia's financial crisis in mid-1997, and many remain reluctant to take on new loans. In Hong Kong, for example, loans growth continues to slow and total loans fell 1.6 percent in November.

And in China, Beijing's closure of Guangdong International Trust and Investment Corp (GITIC) last October and subsequent confusion over which of the company's debts would be repaid has cooled bankers' interest in lending to Chinese firms.