Emerging market credit risk concerns

The forthcoming environment of subdued and weak profitability against a stronger US dollar and higher hedging costs are likely to pose challenges for borrowers


Graphic: Sarvesh Sharma/Mint
Graphic: Sarvesh Sharma/Mint

The good news is that the pace of credit rating downgrades in emerging markets (EMs) eased in the second half of 2016.

Yet, the credit worthiness of EM borrowers is likely to remain a source of concern in 2017, points out a report by the Institute of International Finance.

The risks are mainly for those with higher refinancing needs. The forthcoming environment of subdued and weak profitability against a stronger US dollar and higher hedging costs are likely to pose challenges for borrowers.

During 2016, about 240 non-financial borrowers were downgraded as opposed to only 70 upgrades.

The pace of downgrades was highest for countries like Brazil, China and Hong Kong. Meanwhile, the downgrades in the non-financial segment were not surprising given the rising non-performing liabilities among banks.

Another discerning trend across 20 EMs (sample) is that while the EM debt has increased, some of the non-financial firms have cut back US dollar debt since 2015 and opted for borrowing in euros.

Countries like Turkey, Brazil, Chile and Mexico have increased foreign exchange debt, which highlights the risk of repayment for countries with large external deficit.

Coal India’s muted show in fiscal 2017

Coal India Ltd (CIL) has achieved 90% of its production and offtake (or sales volume) target for the nine months ended December.

That represents 1.1% year-on-year production increase for the first three quarters of this fiscal year and 0.6% increase in offtake.

As the chart shows, the country’s largest coal producer has fallen short of its production and offtake target for every month so far in fiscal year 2017.

According to Nomura Research, the implied requisite production/ offtake growth in the March 2017 quarter is 35.4%/44.7% in order to meet FY17 targets.

The brokerage firm believes CIL’s FY17 output targets are effectively academic in nature.

Cash crunch ups collection worries for pesticide firms

Cash crunch is raising collection risks for agricultural inputs providers.

For instance, in Madhya Pradesh vegetable prices fell sharply after demonetization. This is causing panic among trade and industry as collections will come under stress and demand for pesticides may get hit in the near term, said Emkay Global Financial Services Ltd in a note after it spoke to dealers in the state.

In Telangana, sales on credit have risen significantly and dealers are wary of poor collections.

“As farmers lack liquidity, collections for kharif sale have been severely impacted and companies fear bad debts could rise or at least cash collection will be prolonged which will impact working capital cycle,” Emkay said in the note.

As a precautionary measure, firms are being cautious about how much inventory they are putting out in the retail market, the impact of which could become visible in their quarterly results.

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