Inflation impact on Asian corporates is limited:Moody's

Moderately higher inflation is credit negative, but will not exert rating pressure on most Asian corporates in the near term.

According to Moody's Investors Service,Chris Park, VP-senior analyst and author of the report, said "Rises in input costs and higher interest rates will have negative credit implications for Asian corporates, as these tend to exert pressure on their operating cash flow and profit margins. Inflation and currency appreciation can also undermine the price competitiveness of Asian exporters".  

"However, as long as oil prices do not spike much above current levels for a pro-longed period, the impact will be manageable for most corporate issuers that Moody's rates, and will be largely mitigated by the solid economic environment in the region and robust demand," adds Park.

"This scenario also hinges on Moody's expectation that governments will not implement overly aggressive domestic interest-rate hikes to control inflationary pressure as this could aggravate asset-price inflation," he says.

In Moody's view, utilities with inadequate cost pass-through are the most vulnerable to inflation risk as they are exposed to hikes in fuel and operating costs. The least vulnerable industries include oil and gas E&P and Indonesian coal mining, which benefit from the strong underlying commodity prices. Telecom, and utilities, with adequate cost pass-through, also demonstrate very stable cash flow generation. The rest are considered moderately exposed to inflation risk, and these include auto, chemical, Chinese property, refining & marketing, retail, steel and technology industries.

Moody's considers a further large rise in oil prices as the key downside risk for inflation, as such an increase could slow global growth, push up core inflation and prompt more aggressive interest-rate hikes. This situation could have meaningful rating implications on a broader range of issuers, particularly those with little leeway at current rating levels and in the most vulnerable industries.