Asia Credit: Inflation Winners and Losers

Sandra Chow, CFA - Co-Head of Asia-Pacific Research
Pramod Shenoi - Co-Head of Asia-Pacific Research
Zerlina Zeng, CFA - Senior Analyst - Chinese Corporates
Lakshmanan R, CFA, FRM - Senior Analyst – Asia-Pacific Corporates

EXECUTIVE SUMMARY
  • How does higher inflation shape our outlook for Asia credit? Asian $ bond issuers are grappling not only with the impact of inflation on their home markets, but also with the repercussions of rising US inflation and US interest rates.
  • While every country we follow is facing some degree of inflationary pressure, China may be an outlier. Weak consumer demand and the government’s ability to introduce swift regulatory measures could rein in price increases before they spiral out of control. Indeed, the key concern for China’s policymakers at present seems to be sustaining economic growth rather than curbing inflation.
  • Within the Asia ex-Japan $ credit universe, we believe banks, upstream oil and gas producers, consumer staples and telecoms are the most resilient sectors to high inflation.
  • The most vulnerable sectors include energy refiners, power producers, airport operators and China property developers, in our view.
RELATIVE VALUE

How does higher inflation across the world shape our outlook for Asia credit? Asian $ bond issuers are not only grappling with the impact of inflation in their domestic markets, but also with the second-order effects of rising US inflation. Broadly speaking, higher US interest rates and a stronger US$ do not bode well for emerging markets, making it harder for weaker sovereigns to repay and service their debts, as well as spurring investor fund flows out of emerging markets. Earlier this month, for instance, Sri Lanka announced it would temporarily suspend all payments on foreign debt, but that was a situation of the current government’s own making ever since it cut taxes in November 19, when it came to power.

Within the Asia ex-Japan $ bond universe, every country we follow is facing some degree of inflationary pressure at present. The Reserve Bank of India unexpectedly raised the country’s repo rate by 40 bp to 4.4% earlier this month in an attempt to curb inflation. Indonesia’s consumer price index (CPI) rose by 3.47% YoY in April, with food, energy and air transport fares the largest contributors, while Philippine’s April CPI rose to 4.9% YoY, driven by food, energy and water utilities. China’s producer price index (PPI) rose by 8% year-on-year in April 2022 and CPI rose by 2.1%, according to data from the National Bureau of Statistics. Inflationary pressure has come from COVID-19-related supply disruptions, as well as rising prices of imported oil and gas and metal ores, exacerbated by RMB depreciation. That said, China may be an outlier in Asia, given weak consumer demand, as well as the government’s ability to quickly introduce regulatory measures to curb inflation. For example, the authorities could impose price caps on certain commodities or increase production volumes to boost supply.

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