Moody’s could change the outlook to negative if geopolitical conflicts escalate or persist, posing additional risks to the global economy and financial conditions – or China’s slowdown worsens and triggers widespread deterioration in the region’s growth and credit conditions.
“We could change the outlook to positive if monetary policy becomes more accommodative, interest rates moderate to pre-pandemic levels and we expect earnings to grow for a wide range of sectors,” the ratings agency says.
Geopolitical tensions drive investment priorities and supply chain shifts. Moody’s notes that semiconductors and commodities, including exporters and importers, are exposed to US (Aaa negative) and China (A1 negative) tensions, which is affecting the sectors.
Electronic hubs like South Korea and Japan (A1 stable) continue to build capacity outside China to benefit from economic incentives. Indonesia is also emerging as an important player in the electric vehicle supply chain.
The stable outlook for companies in Asia-Pacific reflects Moody’s view of credit fundamentals for non-financial companies in Asia-Pacific excluding greater China over the next 12 months.
Sector outlooks are distinct from rating outlooks which, in addition to sector dynamics, also reflect issuers’ specific characteristics and actions.
Moody’s notes that the sector outlook does not represent a sum of upgrades, downgrades or ratings under review, or an average of rating outlooks.
According to the ratings agency, the global steel market remains oversupplied, which is keeping prices low. China’s steel exports through September 2024 already crossed 80 million tonnes, 21% higher than in the same period a year ago.
Higher Chinese exports within the region weigh on Indian, Japanese and Korean steel companies. As a result, Moody’s says steel prices will continue to be lower in Asia-Pacific than in the Americas or Europe. While many countries including India are clamping down on cheaper imports by imposing tariffs, subdued steel prices will drive a decline in aggregate revenue in 2024 before a return to growth in 2025.
“In India, new taxes on mining activities will further squeeze steel-makers’ margins. Revenue for the metals and mining sector will likely decrease marginally in 2025, mainly driven by our price sensitivities, which are lower than current commodity prices,” Moody’s reports.
“China’s economic slowdown affects all mining commodities, with a more pronounced effect on sectors directly linked to the slowdown. For instance, the previously thriving property sector heavily influenced steel demand, which in turn supported iron ore and metallurgical coal. Conversely, base metals are set to benefit from the growth in electric vehicles and energy infrastructure.”
Asia-Pacific is poised to enjoy robust growth with inflation in most markets getting close to central bank targets by which the average GDP growth is expected to be 4% versus 3.9% in 2024.
Australia (Aaa stable), Singapore (Aaa stable), and South Korea (Aa2 stable) are forecast to lead growth rates in developed markets in the region in 2025.
“We estimate Australia’s real GDP growth will moderate to a below-trend 1.3% this year before a recovery in real incomes and dwelling investment support a rebound to 2.5% in 2025,” Moody’s reports.
“In Korea, GDP will grow by 2.1% as a cyclical upswing in global semiconductor demand will partly offset domestic economic weakness until rate cuts revive consumption. Meanwhile, Singapore’s high level of diversification – in terms of economic activity and sources of demand for its goods and services – and prompt fiscal intervention will support growth of around 2.4% for the fiscal year through March 2026.
“We expect Japan’s (A1 stable) economy to expand by 0.8% in 2025, assuming the domestic demand recovery in the second quarter has continued strengthening in the second half of this year. Wage growth should continue to power household spending. Our baseline GDP forecasts incorporate some uncertainty related to US domestic and international policies.”
India’s growth is expected to remain resilient despite easing from record highs; Indonesia will likely sustain its growth pace. Australia (Aaa stable), Singapore (Aaa stable) and South Korea (Aa2 stable) will drive developed market growth.
Capital spending remains stable
On average, next year earnings are poised to grow about 7% across sectors, except commodities amid price uncertainties. Capital spending will remain high, partially driven by carbon transition, technological upgrades and green product development. Internal cash flow will contain the rise in leverage, Moody’s further reports.
Capital spending for the region will remain relatively steady at about $428 billion in 2025 after significantly stepping up in 2024. Dividends will also remain steady but at high levels, such that aggregate free cash flow remains negligible.
Moody’s adds that capital spending for metals and mining companies will remain elevated in 2025 after rising 7% in 2024, due to investments to decarbonise operations. While coal demand in Asia-Pacific will remain resilient compared to North America and Europe, Moody’s says many rated coal miners here are likely to acquire non-coal assets to diversify their revenue.
Ongoing investments in gold, other minerals (including aluminium and nickel), renewable energy, electric vehicles and logistics will allow these miners to preserve their long-term credit quality. However, earnings from diversification investments are expected to be small for coal miners in the region in 2025.
Meanwhile, Australian companies are reducing dividend payments to counterbalance the impact of high spending. TMT, oil and gas, automotive, and manufacturing contribute around 65% to the Asia-Pacific region’s capital spending.
The ratings agency also flags that in 2025 easing inflation will spur rate cuts that support spending and interest coverage will also improve in the region.
Write to Adam Orlando at Mining.com.au
Images: Moody's & Adobe Stock
