Asia-Pacific's Strong-Dollar Problem Is An Inconvenience Today, Headache Tomorrow

Nov 11, 2022, 11:15 pm

Foreign-exchange risk is bearing down on Asia-Pacific corporates. The effects magnify imported inflation, weigh on investor sentiment and constrain funding. While Asia-Pacific corporates have largely managed currency-mismatch effects so far, S&P Global Ratings expects these strains to squeeze entities with substantial dollar debt due in the coming 12-18 months.


Speculative-grade issuers with steep operating and financing currency mismatch are vulnerable. Such entities have been largely priced out of offshore debt markets for some time. Those that can have turned to domestic bond or loan markets. They still need to repay maturing offshore bonds using a devalued domestic currency.


Asia-Pacific is in the middle of a set of rapid interest rate rises coming out of the U.S. We expect the macro pressures to build on regional foreign-exchange rates, as apparent in widening current account deficits emerging in many countries.


"Firms that have difficulty passing on their higher input costs, including currency impact, to their customers, are more vulnerable," said S&P Global Ratings credit analyst Simon Wong. "On the other hand, firms that proactively hedge their currency mismatch and those with material U.S. dollar revenue and local costs are more resilient."

Vulnerable sectors include airlines and power utilities in Japan and Korea. Dollar strengthening has magnified the credit hit on these entities stemming from spiking fuel costs. Airlines' financial debt and aircraft leases are typically in dollars. Regulators often impose delays on when utilities can pass through these rising costs to consumers.


Credit quality is likely to be moderately strained for companies with a material operational currency mismatch, such as a net exposure to U.S. dollar input costs. The hit on their margins and operating cash flow will depend on the timeliness and magnitude of cost passthrough to customers. Meanwhile, high inflation may erode consumers' ability to pay for these higher prices.


Our report includes a sector-by-sector heatmap of sectors most affected by currency moves, across Asia-Pacific. We also provide in-depth analysis for the most affected countries in the region, with a discussion of the effects on exposed corporates.

Currency effects are part of a set of interrelated risks that include rate increases, a global economic slowdown, and inflation.


"Currency strains may spread to investment-grade entities, or to sectors that have been largely resilient, should dollar strengthening continue deep into 2023," said Mr. Wong. Moreover, currency volatility has increased the cost of hedging, adding to already swollen funding costs.