Recession hounds APAC financial firms as pandemic batters credits

The outbreak will permanently reduce the economy by 2-3%.

Recession risks are looming over Asia Pacific financial institutions as the economic effects of the pandemic weigh heavily on banks’ credits, a S&P Global Ratings report warned.

Macroeconomic forecasts are the primary drivers of forecasts around APAC financial institutions’ credit, said analyst Ryoji Yoshizawa. Whilst GDP trends are expected to revert to pre-pandemic levels by end-2023, the outbreak will have permanently curtailed the regional economy by 2-3%.

“We see a looming risk of a "balance sheet recession" weighing on Asia-Pacific's economic growth. That said, we expect the hit to the Asia-Pacific economy in 2020 to be less severe than the eurozone (-7.8%) and the U.S. (-5.0%),” the report wrote.

In addition, credit metrics may not rebound to 2019 levels until 2023, and the low interest rate environment does not look good for profitability.

The road to recovery may be particularly agonising for India and Indonesia, as the former is looking at a very sharp economic slowdown and had high nonperforming loans pre-COVID. The latter, on the other hand, are full of firms suffering from a sluggish economy, feeble commodity prices, and high forex debt which may spill over to the banking sector, S&P concluded.