Why this crisis is different from the last

BlackRock’s head of Asian Credit, Neeraj Seth, tells PDI why he expects financing gaps to accelerate in parts of Asia.

The current crisis is not a repeat of 2008, a view increasingly held by institutional investors.

Among credit investors targeting both public and private debt in Asia-Pacific, Neeraj Seth, Singapore-based head of Asian Credit at BlackRock, said investors see “differences in the stress build-up, and how sovereigns manage credit capacity”. He added that investors should expect financial disintermediation to accelerate in many Asian countries.

See all Private Debt Investor’s coverage of covid-19 and its impact here.

Seth co-leads BlackRock’s Asian-Pacific Private Credit Opportunities Fund with Justin Ferrier. As PDI reported, the fund was launched in 2017, focusing on senior secured lending in the mid-market and opportunistic credit investments, including stressed deals in selected countries such as China and India.

According to Seth, another reason why the covid-19 downturn is different from the global financial crisis is that current credit cycles are not fully synchronised and homogenous across the region: “[The current scenario is] unlike some of the historical experiences where the US credit cycle drove the global cycle.”

Some economists think credit cycles lead business cycles because access to credit, as well as the demand for credit, can expand or contract over time. According to Credit Cycles and Asset Returns, research by PIMCO in November 2019, macroeconomic history provides evidence that periods of more rapid growth in economy-wide leverage are more likely to be followed by slower growth, deeper recession and a greater chance of financial crises.

Seth also remarked that there is a historical correlation between credit and economic cycles, with the credit cycle leading the economic cycle by 12-24 months.

However, governments’ economic responses to pandemic-affected businesses seem to be further dispersing stress build-up among different countries and sectors.

So far this year, governments and policymakers across Asia-Pacific have been focusing on budget revisions for public spending and offering low-to-zero interest rates to end-borrowers to support coronavirus-affected areas.

For instance, China plans to issue 1 trillion yuan ($142.5 billion; €126.4 billion) of government bonds for covid-19 control, according to Xinhua, the state-run news agency, citing a government work report submitted to the national legislature for deliberation on 22 May.

The central bank in China, People’s Bank of China, also announced it will lend, at zero interest rate, to eligible local banks to support 40 percent of their new credit loans to small enterprises.

India announced a stimulus plan sized at $266 billion as part of its economic response to the coronavirus crisis on 13 May.

According to Seth, India’s financial disintermediation is in a much more nascent stage compared to China.

“In both countries, we see better risk-reward in lending to mid-market [in India] and upper mid-market borrowers [in China] with more diversified businesses,” he noted, adding: “We are cautious on lower mid-market companies especially industrial, commodity-focused and export-oriented companies in both countries.”

Offering his view on corporate credit availability going forward, Seth told PDI his team is observing the expansion of the fiscal deficit in selected countries in Asia.

He added: “Overall, as the economic activity starts to resume and demand for credit picks up for growth capital over and above the refinancing and ongoing capital expenditure [levels], we do believe that there will be gaps in the availability of credit through traditional channels like banks, non-banking financing vehicles, and capital markets, leading to the growth of private credit opportunities in both India and China.”

Among other countries in the region, Singapore announced a plan to draw up to S$52 billion ($37.3 billion; €33 billion) in total from its past reserves given the covid-19 crisis; Thailand is to spend more than $32 billion, especially via its corporate bond stabilisation scheme; and Indonesia with its stimulus package sized at more than $47.8 billion. Notably, many of these measures include large amounts of debt, rather than cash spending.