Covid-19 continues to weigh on the financials of companies in Asia-Pacific, with S&P Global Ratings saying that its ratings on a net 16% of the debt issuers in the region have negative outlooks or are on CreditWatch with negative implications.

Although a slight improvement over recent months, the ratio still implies a significant likelihood of downgrades or defaults in 2021, the US credit rating agency says in a report issued on Monday (April 12), “Sector Roundup Asia-Pacific Q2 2021: The Climb Back is Steeper for Some”.

"The economic recovery in Asia-Pacific indicates an upside to revenue in 2021," says Eunice Tan, a credit analyst at S&P Global Ratings. "However, the substantial hit to borrowers' financials in 2020 means that a full recovery to 2019 credit metrics is unlikely for the majority of issuers until well into 2022."

For the region's non-financial corporates, most will need until 2022 before fully recovering. In its base-case scenario, the agency forecasts median profit growth in the mid-to-high single digits this year; higher profits at nearly 90% of rated entities in 2021; and average credit ratios that revert to pre-Covid-19 levels in the second half of 2022 for the majority of sectors.

For financial institutions, credit losses will hit US$581 billion over 2020-2022, S&P says. While the pandemic is hitting lenders hard, the agency recently revised down its forecast of credit losses for China and the rest of Asia-Pacific over 2020-2022. Fiscal support and forbearance have contained the damage, but downside risks remain as these programmes unwind.

Risks to market confidence remain, according to the report.  The economic shock from Covid-19 was largely cushioned by governments printing money, which helped to support real asset prices and drive up financial asset prices.

“Investors and creditors could reset their risk-return requirements if they believe inflation is returning or possibly in response to a high-profile default,” S&P Global says. “The resulting higher cost of debt and reduced access to funding could hit issuers with elevated debt loads, especially in harder Covid-hit sectors.”