There is one dynamic that increasingly colors Asia-Pacific sector trends: geopolitics. Simmering conflicts across the Middle East could risk a resurgence of inflation as supply chains and trade flows face disruption. Higher levels of interest rates are keeping refinancing costs high, squeezing corporates' profit margins.

If combined with a hard economic landing, S&P Global Ratings believes growth prospects could dampen further. Meanwhile, with a batch of elections taking place across Asia and the U.S., shifting government initiatives could further complicate an increasingly divergent credit landscape.

S&P Global Ratings hosted a webinar on Jan. 30, 2024, that examined the intersection between geopolitics and sector credit trends. We present the sharpest views and liveliest exchanges below, reflecting the frequent queries we hear from investors.

Frequently Asked Questions

What is the outlook for the region in 2024 in terms of credit conditions, interest rates, and currency trends?

2024 is looking to be a mixed year for Asia-Pacific sectors. Election cycles are underway; these could lead to fiscal and monetary policy swings, spurring volatility. Ongoing geopolitical developments weigh on supply chains and trade, hiking costs for businesses and risking another bout of inflation.

China's ongoing property and local government pressures, and weak household confidence, could spill over into related sectors and the broader economic recovery. Sector prospects diverge, as reflected in our net rating outlook bias on the region. While overall steady at 0%, the bias is unevenly distributed across sectors.

In the U.S., the Fed has made remarkable progress reducing inflation even as growth has remained solid. But, given that economic momentum is strong and labor markets remain tight, further progress in cutting consumer inflation won't come quickly. The Fed will be cautious. We expect the first cut only in mid-year, and see cuts totaling 75 basis points this year (to 4.5%-4.75%).

Inflation has come down more decisively in Asia-Pacific. But we expect central banks to take their time cutting rates. They will look at what the Fed is doing, with an eye on their currencies.

In Japan the direction for interest rates is the other way—i.e., up. In our reading of the Bank of Japan's recent language, it would likely raise the policy rate to 0% in April if, as expected, wage agreements in the spring wage round are solid.

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What is the risk of conflict in the South China Sea?

No one wants a conflict but accidents could happen, especially when both China and the U.S. are deploying military assets in the region.

The question is how these parties may handle conflicts. Even if the worst is unlikely, accidents involving military equipment could have consequences, with U.S.-China relations much less conducive to a quick resolution than in the past.

Even if no conflict breaks out, negative political, trade, and financial measures may be imposed by one side on the other. The measures would hit global sentiment and constrain trade and investment--damaging for Asia-Pacific, which relies on both to flow freely.

What is the outlook for regional carmakers; how will EV trends affect performance?

For 2024, we expect sales growth to moderate in the region's key markets.

For China, we expect up to 2% growth this year, with macro headwinds weighing on consumer sentiment. That said, Chinese auto firms have set ambitious targets for 2024. Electric vehicle (EV) start-ups such as Li Auto Inc. and XPeng Inc. expect to double sales.

Competition should intensify in the Chinese market, given slower growth and increasing supply. Traditional carmakers that focus on the mass market, including joint-venture brands, will find it harder to protect their volumes, given we expect internal combustion engine (ICE) vehicle sales to keep falling.

EV sales growth in China will likely decelerate to 15%-20% in 2024, from a near 40% expansion last year. The EV market is becoming more crowded with plenty of model launches. A few EV players including Tesla Inc. already cut prices in early January. We believe the price war will continue through the year. This will weigh on margins, despite moderating raw material prices.

Japanese and Korean carmakers will continue to moderately expand unit sales in 2024. However, their sales could languish in China due to pressure from domestic brands, which are improving product quality and are competitive on costs.

Japanese car firms are strong in ICE and hybrid models, and their EV strategy is not aggressive. That's a problem, in our view, since consumer demand is shifting rapidly toward EVs. Japanese carmakers will likely remain laggards in the EV segment, although Toyota Motor Corp. aims to sell 1.5 million battery EVs in 2026 by launching 10 such models.

Will China's property market bounce back in 2024?

We expect China's property sales to track an 'L'-shape recovery. In 2024, we think sales will drop to Chinese renminbi (RMB) 11 trillion-RMB11.5 trillion, from about RMB11.6 trillion in 2023.

Annual China property sales should find support at RMB10 trillion-RMB11 trillion, and then bump along this level for years.

The government's recent supportive policies such as reducing downpayment ratios, lowering mortgage rates, and redeveloping urban villages could help sales in upper-tier markets. But lower-tier markets will continue to see excess supply and weak demand.

All developers will likely have to manage slowing sales, and their leverage should stay high for the next two years.

To contain their leverage, Chinese developers will seek recurring income such as rental from shopping malls, in our view. They will also sell noncore assets, such as equity investments, or other holdings such as hotels and offices.

That said, state-owned developers should have continued access to multiple funding sources (which means they can buy land and build homes), and have more saleable resources compared with private peers.

How will commercial real estate fare in 2024?

Credit metrics for most Asia-Pacific landlords and REITs will modestly erode in 2024, especially their interest coverage ratios, owing to the sharp increase in borrowing costs. Weaker financial ratios will also mean reduced covenant headroom, making it harder for landlords to adhere to their financial policies.

Office landlords will continue to be squeezed, driven by historically high vacancy rates in key gateway cities such as Sydney and Hong Kong, accentuated by hybrid working and excess supply.

What are the key changes in China's consumption patterns amid slower economic growth?

We are seeing a slower-than-expected pickup in consumer sentiment into 2024. Chinese consumers are becoming more selective and deliberate with their purchases, with downtrading and avoidance of large-ticket items. Consequently, we forecast retail sales to underperform GDP this year.

Despite a low official unemployment rate and rising disposable income, people are contending with diminishing wealth effects from falling property prices and a soft domestic stock market. Moreover, pessimism about the economic outlook and geopolitical flareups are hurting consumers' willingness to spend. Savings are trending above pre-COVID levels as a result.

What are the key messages of the recent China policy meetings for 2024, and their implications for local and regional governments (LRGs)?

Economic stability will be central to LRGs' policy agenda this year. This includes stabilizing the property sector, as well as managing default risks among local government financing vehicles (LGFVs).

We think fiscal policy at the local government level could stay cautiously loose. Local governments may maintain spending to support businesses and consumption, which in turn would largely be funded by debt--a continuation from 2023.

That said, the Chinese authorities are trying to address mounting default risk among LGFVs, which comprises two-thirds of total debt among China's state-owned enterprises.

Since the fourth quarter of last year, 12 heavily debt-burdened regional governments identified by the State Council--including Guizhou, Tianjin, Yunnan, and some others--have collectively raised RMB1 trillion through the issuance of "special refinancing bonds". Proceeds of such bonds are primarily used to settle a portion of hidden-debt held by LGFVs, and government payables.

However, even such measures are insufficient compared with the size of LGFV debt stock. Banks and governments are coordinating to allocate scarce funding resources to the "most worthy" LGFVs. In other words, support will more likely go to higher-tier entities or those holding critical assets for their government owners. In many cases, such support could be even uncertain for lower-tier LGFVs, representing a much bigger share of sector debt.

What are the key watchpoints for energy in Asia-Pacific?

In China, power demand growth has moderated on the back of a soft economy. This should help the country's power sector hit peak carbon by 2025, five years ahead of target. Incremental power consumption can be met by renewable additions, particularly wind and solar.

We think Indonesia and Vietnam will need significantly more renewable capacity and new technologies to meet its net-zero target by 2050, as the power sector contends with large financial and capacity gaps. Credit profiles on power utilities may deteriorate if they adopt more aggressive leverage to invest, and if their cash flows do not increase adequately.

In Australia, energy transition will accelerate in 2024. Mergers and acquisitions are also likely as we expect further consolidation in the renewable space.

Is the technology hardware sector on the precipice of a recovery?

We expect global information technology spending growth to accelerate to around 8% this year, supported by a turnaround across the hardware end device segments including PCs, smartphones, and servers.

This will likewise fuel a strong semiconductor recovery in 2024, together with growing demand for new technologies. We expect total semiconductor revenue to be up 14% this year, after falling 10% in 2023.

That said, the semiconductor market continues to face significant geopolitical risk stemming from U.S.-China tensions. Further divergence in the semiconductor supply chain and retaliatory policies are likely, which would likely increase inefficiencies and raise prices for end users. The U.S., China, Europe, and many countries in Asia will continue to increase local chip production, which could pressure pricing for chips, particularly for those in the mature process nodes.

Has 5G paid off for Asia-Pacific telcos?

5G has achieved limited returns for telcos so far. For now, use cases are mainly limited to providing consumers with faster and higher-quality mobile connections and fixed-wireless access. We believe meaningful monetization opportunities for 5G lie in enterprise use cases such as self-driving cars and smart factories, but these remain some time away.

Moreover, the 5G take-up rate remains low in most consumer markets. More importantly, average revenue per user has not significantly increased.

What factors are shaping the outlook for the metals and mining sector in 2024?

After a few strong years against a backdrop of solid prices for metals, the outlook for 2024 appears to be less certain, with likely weak Chinese growth a key driver.

We see divergence along the value chain, and across subregions. Although most metals prices should moderate in 2024 on the back of soft demand, most upstream companies in Asia will achieve output expansion from new projects, which should partially offset the price hit. Labor and fuel cost pressures may ease in 2024, steadying profitability for these companies.

On the other hand, we think downstream steel sector weakness in China will persist, as the country's real estate problems remain a drag. We expect Chinese companies will continue to struggle amid subdued demand from key end-use sectors.

What would a policy rate hike by the central bank mean for Japanese banks?

A gradual rise in the policy rate by the Bank of Japan should generally lift earnings for Japanese banks.

However, we believe the actual impact on bank earnings will differ for each lender, depending on the characteristics of each entity's core business. For instance, the degree of improvement in loan or bond yields, or the increase in unrealized losses on bonds and credit costs of exposed loans, could vary across banks.

Banks with high profitability and creditworthiness will benefit from a policy rate hike as the positive impact from a rate hike outweighs the negative. However, banks with low profitability will not be able to enjoy the positive impact from a rate hike and will likely suffer more.

Writer: Jasper Moiseiwitsch

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