Moody’s: Major sectors exposed to credit stress from trade war


THE Russian and Ukraine conflict which has triggered the global recession is now exposing major sectors to material credit stress, according to Moody’s Investors Service.

Moody’s VP and senior analyst for corporate finance group Maisam Hasnain said that about 27% would experience the downside scenario from the war conflict.

Among the economic and credit impacts of the Russia and Ukraine conflict are the rising commodity price and supply shocks, financial and economic disruption and security challenges.

According to Hasnain, about seven to eight companies under Moody’s portfolio currently fall into the high-risk category, which will suffer material credit deterioration in the baseline scenario.

“But we also ran a downside scenario between Russia and Europe war trade that could trigger a global recession with now the number of companies exposed rising pretty significantly.

“So, from seven to eight, about 27% of our reading portfolio could experience material credit stress in such a downside scenario,” he said at MARC Malaysian Bond and Sukuk 2022 virtual conference on Thursday.

He said that the automotive; chemical; and refining oil and gas (O&G) sector are highly exposed to higher input costs, followed by property, palm oil, steel and integrated O&G sectors.

Automotive is also highly exposed to profit margin compression, while other sectors are at moderate and low risks.

Chemicals and refining O&G are highly exposed to the increasing working capital needs risks if the trade war continues.

“I think one trend that should extend is that commodity prices will remain volatile against this backdrop of macroeconomic uncertainty,” he said.

Additionally, he said that environmental, social and governance (ESG) goals are significantly important in credit trends.

“We cannot talk about credit trends without mentioning ESG — which is becoming increasingly relevant to market participants,” he added.

Noting on the faster tracking transition to green energy that happened in the West due to the Russia-Ukraine conflict, Hasnani sees the short-term and longer-term implications of this.

“I think there are the short-term and long-term implications — I think in the short term, at least if you look at what’s happening in Western or parts of Europe, there is reorientation towards energy security.

“The longer-term trend is a secular decline in demand for thermal coal, and we don’t think that has changed that move towards renewable net zero,” he added.

Global energy prices have jumped since February due to the trade war following the Russia-Ukraine conflict, hence pushing European countries to find ways to rely less on Russian gas.