Moody’s maintains ‘Stable’ outlook on Asian power sector in 2019

The rating firm expects most-rated power companies to report stable operating cashflow over the next 12 to 18 months


The outlook for the Asian power sector in 2019 is seen as stable on steady cashflows, gradual pace of regulatory changes, a gradual transition to a low carbon economy and sufficient mitigants against capital market volatility, said Moody’s Investors Service Hong Kong Ltd.

Moody’s VP and senior credit officer Mic Kang said the firm expects most-rated power companies to report stable operating cashflow over the next 12 to 18 months.

“This will be helped by stable or increasing dispatch volumes or timely cost pass-throughs amid a gradual pace of regulatory changes, thus supporting their credit quality.

“However, regulatory challenges are starting to adversely affect the credit metrics of Korean and Japanese companies because of prolonged delays in cost pass-throughs in Korea and growing competition amid market deregulation in Japan,” Kang said in a Moody’s “Power — Asia: 2019 Outlook Stable, With Steady Cashflow Offset by Regulatory Challenges” report released yesterday.

Growing power demand or timely cost pass-throughs will also mitigate the strain on cashflows from higher generation costs and higher capital spending for most-rated power companies in Asia.

Moody’s 2019 outlook on Asia’s power sector, which has been stable since 2009, reflects its expectations for stable business conditions in Malaysia (A3 stable), China (A1 stable), Hong Kong (Aa2 stable), India (Baa2 stable), Indonesia (Baa2 stable), the Philippines (Baa2 stable), Singapore (Aaa stable) and Thailand (Baa1 stable).

Its outlook is negative on Korea (Aa2 stable) and Japan (A1 stable), given the greater regulatory challenges faced by companies in these countries.

Power demand is expected to be stimulated by economic growth, rising incomes and ongoing urbanisation, particularly in India, Indonesia and the Philippines.

Growth in power demand will likely remain steady at 0.5% to 2% in Malaysia, Hong Kong, Korea, Singapore and Thailand, although in China it will slow to 3% in 2019, reflecting the high base of comparison in 2018 and slowing GDP growth in the country, while Japan’s power demand will also decrease with population declines and energy conservation.

For rated power companies in Malaysia, Hong Kong and Singapore, steady regulated returns will mitigate the effect on cashflow from lower sales volumes.

Regulations associated with market structures and tariff systems will remain broadly stable for most Asian power companies over the next 12 to 18 months, as most of the six countries that have announced sector reforms will change their regulations gradually, thus supporting cashflow stability.

Moody’s also does not believe most of its rated power companies will face liquidity or funding risk during the coming 12 to 18 months, as these firms generate steady operating cashflow, have adequate access to debt markets and/or do not have material near-term debt maturities denominated in foreign currency.

Companies’ funds from operations will likely remain insufficient to cover all of their budgeted capital spending to expand capacity and develop renewables, hence companies will continue to raise debt.

“We believe most will be able to borrow and issue bonds to fund any shortfall because they are investment- grade, government-owned integrated power utilities in Malaysia, China, India, Indonesia, Korea and Japan,” Moody’s said.

It does not expect a significant improvement in business conditions over the next 12 to 18 months that would prompt a change in sector outlook to positive, as global trade tensions, local currency weakness and tightening global liquidity remain.

“We expect a more challenging year for the power sector in Asia given trade tensions — particularly between the US and China, weakening of local currencies against the US dollar and tightening of global liquidity,” the credit-rating firm added.

The outlook for the broad Asian power sector could also change to ‘Negative’, if Moody’s expects cashflows to be lower than projected due to materially weaker power consumption growth or an inability to pass through increased costs in a timely manner.

Further factors driving a ‘Negative’ outlook would be adverse change in regulations, rapid emergence of carbon transition risk and power companies’ funding capacity being weakened by global capital market volatility.