The ‘goldilocks’ growth drivers that delivered a synchronised regional upturn in 2018 have reversed or are missing in new year. First, monetary policy normalisation by the Federal Reserve puts an end to the era of cheaper dollar funding enjoyed by the region to propel growth. A combination of high debt and high asset prices that had evolved over much of Asia Pacific (APAC) during periods of low interest rates, set the stage for a material tightening of liquidity and funding conditions and potential deterioration in credit quality. International credit rating agency Moody’s outlines relative stability for APAC banks in 2019, although it does not rule out the possibility of downside risks at this stage. “What can change our view to more negative assessment are essentially, a much sharper economic slowdown from a fully escalated trade war or restriction on market access to refinancing leading to large nonperforming loans (NPL),” said Eugene Tarzimanov, vice president at Moody’s Investor Service.

Second, APAC is losing steam as second-order impacts (economic slowdown as opposed to direct exposures) of trade and tariff disruptions become more visible, although growth still remains at solid level. Third, once resilient, slowdown in Chinese growth is also having a protracted impact on banks. Crackdown on shadow banking, higher interest rate refinancing for corporates and more stringent rules on NPL recognition point to worsening asset quality “China’s economic slowdown is not only structural but partially cyclical, related largely to negative sentiment from a difficult external environment and slew of anti-corruption measures implemented by the administration,” highlighted Alicia Garcia-Herrero, chief economist for APAC at Natixis.

On a positive note, asset quality remains broadly stable with low levels of NPL in developed markets of Australia, Hong Kong, Japan, South Korea, New Zealand and Taiwan, with the exception India where NPL re...

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