A new report from Moody’s Investors Service revealed that the APAC high-yield default rate for non-financial corporates would remain high and that policy stimulus will provide companies with some relief, but not fully offset escalating credit risks.
The rating firm’s credit transition model forecasts the trailing 12-month high-yield corporate default rate for Asia Pacific at 6.0% at the end of 2020 under its baseline scenario which is materially higher than the 1.1% default rate in 2019.
The higher default rate forecast reflects the profound negative impact of the coronavirus-driven global economic recession on many companies’ operating and financial performance, raising the default risks of weaker companies.
Under such a pessimistic scenario, Moody’s forecasts that the Asia Pacific high-yield nonfinancial corporate default rate could reach 8.1%, assuming a longer period of suppressed consumer spending amid the pandemic and leading to a worse economic outcome.
“The second quarter of 2020 is likely to be the worst quarter for global economic contraction since World War II, with no quick recovery in sight,” said Moody’s senior vice president and group credit officer Clara Lau.
According to her, the ability of businesses to recover will depend on the pace of a rebound in consumer demand – which in turn hinges on governments’ ability to restore confidence by reducing fear of contagion. But new widespread outbreaks, if they occur, will cause renewed economic disruptions.