APAC growth risk slowing down with Russia-Ukraine conflict

Russia’s (Ca negative) invasion of Ukraine (Caa2 review for downgrade) carries growing risks to the global economy, with spillovers to the Asia-Pacific (APAC) through several channels – notably weaker growth, higher inflation and financial market uncertainty that will exacerbate pandemic-related economic scarring, according to a new report by Moody’s Investors Service.

“Despite relatively small direct economic and financial linkages with Russia and Ukraine, many APAC economies will face heightened macroeconomic risks stemming from the shock to global commodity prices and constrained access to industrial metals. Several economies risk backsliding on debt consolidation,” says Nishad Majmudar, a Moody’s Assistant Vice President and Analyst.

More than half of rated APAC economies send over 10% of their exports to major EU countries, whose growth will likely decelerate because of the spillover effects of international sanctions and restrictions on Russian energy imports.

The onset of more severe sanctions on Russia from February will generate further downside pressures to global trade, growth and access to raw materials.

Higher commodity prices will weaken credit conditions for some utilities, transportation and other fuel-intensive sectors, but oil and gas exploration and production companies and some agricultural producers will benefit.

APAC constraints

And APAC economies’ constrained access to industrial raw materials from Russia and Ukraine will have indirect effects for companies involved in the production of semiconductors, electronics, autos and electric vehicle batteries, through higher prices of nickel, palladium and aluminum.

Market volatility and currency depreciation pressures in the event of a prolonged military conflict will hurt the credit quality of sovereigns and speculative-grade companies with a significant dependence on foreign-currency commercial funding and high near-term refinancing needs.

However, cybersecurity and sanctions compliance risks are low for APAC issuers, although some governments that have a vocal stance against Russia’s invasion may be susceptible to financially motivated cyberattacks.

Subscribers can access the report here