Mid-Year Outlooks for APAC Sector Less Risky Due to China’s Recovery

The mid-year outlooks for the Asia-Pacific (APAC) sector seem less risky, largely attributable to China’s economic recovery. This represents a significant pivot from previous predictions, highlighted by Fitch Ratings’ recent analysis of 47 mid-year sector outlooks in APAC. Of these, they classified 13 as ‘deteriorating’, 30 as ‘neutral’, and four as ‘improving’.

These figures underscore the impact of eight outlook changes since the release of the 2023 sector outlooks in late 2022. Among these alterations, seven were positive, with the only negative revisions being the shift in the outlook for Australia and New Zealand banks from ‘neutral’ to ‘deteriorating’.

A deeper examination of Fitch Ratings’ portfolio of sectors in APAC reveals that the share of outlooks assessed as ‘deteriorating’ stands at 28%, a figure considerably larger than the 8% deemed to be improving. However, this signifies a marked enhancement from the initial sector outlooks for 2023 when 39% of outlooks were categorized as ‘deteriorating’, and a mere 4% as ‘improving’.

Despite the persisting challenges, Fitch Ratings anticipates lower growth in most regions in 2023 compared to 2022. Export prospects continue to be frail, but the region is seeing modest benefits from China’s reopening. Moreover, domestic demand is stronger in some regions than Fitch Ratings had previously projected. Decreasing inflation rates should also bolster consumer spending.

Most APAC sovereign nations are experiencing a reduction in external imbalances. However, Fitch Ratings expects the decrease in the fiscal deficit in 2023 to be moderate in most areas. High household debt and falling house prices present a vulnerability in Australia, New Zealand, and Korea, but Fitch Ratings believes these risks are manageable at present.

The comprehensive outlook on the APAC Corporates sector has transitioned from ‘deteriorating’ to ‘neutral’. This shift follows outlook revisions on China Engineering & Construction, China Steel & Cement, and Global Mining from ‘deteriorating’ to ‘neutral’.

Numerous Chinese corporations have profited from the country’s reopening since late 2022. Nevertheless, Fitch Ratings still predicts the aggregate net debt/EBITDA leverage for APAC corporates overall to escalate from 2.1x in 2022 to 2.5x. This rise is driven by the weaker global economic environment and high capital intensity. Nevertheless, it’s clear that China’s recovery has played a vital role in mitigating the risks to the mid-year outlooks for the APAC sector.