Risk of corporate defaults doubles

MANILA, Philippines — Moody’s Analytics said the average risk of defaults for companies in the Philippines and other countries in Southeast Asia has doubled in the first quarter amid the economic fallout from the global health crisis.

David Hamilton, managing director for credit risk analytics for Asia Pacific at Moody’s Analytics, said corporate default risk surged throughout Southeast Asia, doubling to two percent from one percent in the Philippines due to the coronavirus disease 2019 or COVID-19 outbreak.

In a report, Hamilton said the average probability of defaults for companies in the region jumped near the end of February, but are still far from the level recorded during the global financial crisis in 2008.

For one, he said the average country-level corporate probabilities of default have doubled in the Philippines, Malaysia and Thailand since January due to the pandemic.

In other cases, such as Singapore, the average probabilities of default started at an already elevated level and increased by about 20 percent since the start of the year.

The research arm of Moody’s said the average one-year default probabilities stood highest in transportation with 5.2 percent, travel/entertainment/leisure with 3.5 percent, technology and IT services with 3.1 percent, finance companies/brokers/dealers with 2.1 percent and business products and services with two percent.

“When we look across industry sectors, we find that the effect on corporate credit risk of the coronavirus shock has hit real economy sectors in Southeast Asia particularly hard,” he added.

According to Moody’s Analytics, these sectors have all been negatively impacted by the sharp fall in demand by consumers globally and the pull-back in spending, both now and planned for the future.

Under the assumptions of the severe downturn scenario, Hamilton said the average one-year default probabilities for companies in all of these economies in Southeast Asia would surpass the highs reached during the global financial crisis in 2008.

He said projections also show that peaks in average credit risk for companies in Southeast Asia would not occur until the third or fourth quarters.

“We should emphasize that these are not the expected outcomes at this time, but are in the range of possibility should the public health crisis endure long enough to inflict deeper and more protracted economic damage,” he said.

Moody’s Analytics said COVID-19 would continue to pose economic challenges for economies in Southeast Asia for the foreseeable future.

“As a consequence, its effect on corporate credit risk may linger on well into 2021 and beyond. We saw that sectors of the real economy that have been particularly hard hit by the economic shock also show the highest levels of credit risk,” Hamilton said

So far, the economic fallout has not caused a financial shock that would cause corporate probabilities of default to jump to the levels seen during the global financial crisis as central banks and governments have provided unprecedented stimulus.

In the Philippines, the COVID-19 policy measures of the Bangko Sentral ng Pilipinas (BSP) alone released about P1.1 trillion into the financial system to soften the impact of the contagion.