Fitch: Asia faces tighter borrowing conditions

MANILA, Philippines - Fitch Ratings said yesterday Asian investors are concerned the US Federal Reserve’s upcoming decrease in stimulus may prompt a liquidity crunch among companies in the region.

“Asian investors anticipate that tapering by the Federal Reserve, should it occur at some stage in 2014, will result in 10-year US Treasuries’ yields rising above three percent, and wider credit spreads for Asian corporates,” Fitch said.

“This, in turn, is likely to lead to tighter borrowing conditions, and a higher rate of defaults among Asian corporates,” it added.

The findings were from a survey of 20 fixed-income investors based in Singapore and Hong Kong early this month.

Fitch said  investors had mixed views on when the Fed’s tapering will actually occur, with expectations ranging from first quarter to third quarter next year.

“Some investors suggested that the extent of the negative impact on the bond markets could have been mitigated if tapering had started in September when the market was originally anticipating it,” Fitch said.

The US Fed, since May this year, has been widely expected to scale back its massive bond purchases amid improving growth prospects for the US.

After its meeting in September, during which analysts highly expected the Fed to begin its tapering, the US central bank announced it will keep the stimulus intact.

“Most investors believed that a significant liquidity drain will occur once tapering is officially confirmed as investors are likely to reduce their exposure to bonds in order to minimize mark-to-market losses as US treasury rates rise,” Fitch said.

“Tightened liquidity could last more than six months, until investors are confident rates have stabilized. However, investors stated they are unlikely to exit their existing portfolio in a fire sale manner,” it said.

Fitch noted that investors are expected to be more selective of assets once the US Fed begins its tapering.

“High-grade bonds will potentially benefit from the flight to quality as the liquidity tightens. Market leaders and repeat issuers with higher ratings will be preferred,” Fitch said.

“In contrast, debut issuers will find it more difficult to issue, unless they are well-known or strong State Owned Entities,” Fitch added.