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How post Covid-19 recovery shapes up as economies re-open
Fitch Ratings’ recovery narratives suggest revenue destruction of over US$5 trillion in 2020
29 Jun 2020 | Chito Santiago

The recovery of various sectors will be different across the Asia-Pacific region as the various countries prepare to re-open their economies.

“Some sectors will come back much faster than the others,” says Buddhika Prasad Piyasena, head of corporates for Asia-Pacific at Fitch Ratings. He reckons the prospects of a second wave of the virus outbreak and another period of major lockdowns in the second half of this year to control the spread of the pandemic may pose as the biggest threat to the shape of economic recovery.

For 2020, Fitch’s recovery narratives suggest revenue destruction of more than US$5 trillion, compared to the US$26 trillion of revenue reported by its corporate portfolio in 2019. Another US$3.5 trillion revenue destruction is expected by the end of 2021, bringing the total to US$8.5 trillion.

This estimate, according to Fitch, only covers the rating agency’s corporate rated portfolio, which in turn represents US$14 trillion of the estimated US$74 trillion corporate debt globally.

This comes as Fitch downgraded 28 Asia-Pacific corporates and changed their outlook or watch on a further 32 during the last three months to end-May of this year. All these actions were driven – directly or indirectly – by the disruption caused by Covid-19. Six of the 28 downgrades represent corporates that were downgraded by more than one notch over the period. More Fitch downgrades were announced in June, involving companies in China, India, Indonesia, and elsewhere.

The oil and gas sector accounts for the most revenue destruction in dollar terms, representing 40% of the aggregate revenue fall. While the oil price has recovered from its historic low, pricing is still well inside Fitch’s price-deck estimates, and it expects the economic sentiment to remain subdued after the initial post-lockdown euphoria dissipates.

The most severe relative declines have occurred in the leisure and transport sectors, for which Fitch estimates revenue losses of between 40% and 60% in 2020. Although the sectors account for a relatively minor share,  only 3%, of the aggregated global corporate revenue in the Fitch portfolio, they have a disproportionate contribution to employment in the wider economy. Fitch also identifies a range of sectors and sub-sectors that it expects to prove resilient during the post-lockdown period, including telecoms and individual segments within technology, healthcare and even retail.

So how does Fitch see the recovery of selected sectors in some countries in the region as their economies re-open? Piyasena cautions against generalizing about the broad shape of the recovery within a sector because the domestic situation has a big impact on the state of the recovery across the region.

In the case of China’s homebuilding market, for instance, Piyasena says its recovery is almost close to a V-shape as one can get.

Fitch’s expectations for rated homebuilding issuers are slightly more optimistic than for the overall market, reflecting their scale advantages, lower funding costs and greater geographical diversification. It forecasts a gradual normalization of sales in the second half of this year, following a sharp drop in the first quarter and a significant sequential improvement in March and April. Home sales will remain more robust in tier 1, tier 2 and strong tier 3 cities where there is still pent-up demand.

In contrast, the homebuilding market in Indonesia faces negative prospects, according to Piyasena. The presales in Indonesia’s homebuilding market in the second quarter of 2020 will be 50% lower year-on-year given the strict social-distancing regulations. A gradual easing of social-distancing restrictions will lead to a moderation of the presales decline to 30% in the third quarter and 20% in the fourth quarter.

Sales of industrial and commercial properties will decline more than those of residential properties, given that demand is more sensitive to economic sentiment. On the other hand, the collection of mortgage-funded housing instalments from banks will fall by 10% in the second quarter of this year as the pace of project construction has slowed. The decline will moderate to 5% during the third and fourth quarter of the year.

Meanwhile, the impact of lower oil prices on cash flow in 2020 will be less severe for Asia-Pacific exploration and production companies due to gas prices being linked to moving averages of oil prices and regulated or fixed gas-price contracts in some markets.

The fall in Chinese fuel demand and refinery capacity utilization will have reached its floor by the end of the first quarter of 2020. And because the retail price floor of US$40 per barrel applies, companies will distribute gains to the national energy security fund.

In comparison, the fall in Indian fuel demand and refinery capacity utilization will have reached its floor by the end of the second quarter. Before the Indian government increased duties, starting from May 6 of this year, the fuel retail price had remained constant since mid-March, despite lower oil prices mitigating the impact from inventory losses.

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