S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for joining S&P Global Ratings' live webinar and Q&A today. My name is Philip Chung, senior director and analytical manager of sovereign international public finance and financial services rating, Asia Pacific. I'll be moderating this webinar today. Before we begin, allow me to take you through a quick overview of the web console on your screen and some housekeeping rules. This webinar comes with audio and accompanying presentation slides. You can submit questions at any time during the webinar via the Q&A widget located on the left-hand side of your screen. Also on the left-hand side is a resource list where you can download a copy of the presentation slides and the related commentary the team has published on this topic. Additionally, we invite you to complete a short survey at the end of the webinar. We would love to hear your feedback to help us continue shaping relevant content for you. Please also note that this presentation is not intended for and must not be distributed to retail clients in Australia. Finally, if you face any technical issues, please let us know via the Q&A widget. We will do our best to assist you. Joining me at this webinar are my colleagues from the sovereign and international public finance ratings team: Kim Eng Tan, senior director and sector lead; Andrew Wood, director; Anthony Walker, director; and YeeFarn Phua, director. They will talk about external conditions, fiscal metrics, geopolitical risks, energy price shocks and potential political changes. Just before we begin, I would like to pose a few poll questions to you, the audience. Let's bring out the poll question one, please. So first question: The pressure on Chinese economic growth are likely to be persistent, causing average real GDP growth in the next 5 years to come in below 5%. So do you agree, yes, no? Or you're not sure at this time. Please select your poll questions. [Voting]

Moving on to the second poll question. The Bank of Japan is likely to tighten monetary policy in some form by the end of 2023. Do you agree, a? B, no. Or c, it depends on the economic indicators coming out in the next few months. I will pause again for a few moments to allow you to respond. [Voting]

Okay, let's bring up the final poll question. The Indian economy is likely to see strong investments in the next 5 years as FDI inflows strengthen and healthy public spending on infrastructure is maintained. Real GDP growth in the next 5 years is likely to come in at an average annual rate of: a, 5 -- around 5%; b, around 6%; or c, around 7%. I will pause again to allow you time to respond. [Voting]

All right, thank you very much for participating in the poll. We will review the results toward the end of the webinar, after the Q&A segment. Now without further ado, I shall hand over to Kim Eng to kick off the presentation today. Kim Eng?

Okay, thanks a lot, Philip. Well, so far this year, it has been relatively quiet for sovereign ratings. We've had no change in any rating. Nor did we change any of the outlook in the past 6 months or so. Now in the main I think this reflects the somewhat more stable environment, well, at least compared to the past few years. We do see higher interest rates or rather interest rates going up further in the advanced economies, but we have not seen this leading to very strong and sustained capital outflows from emerging markets, particularly from this region. And where they happen, they are not so difficult as to cause pressures or strong pressures on credit metrics. Energy prices, which went to quite high levels soon after the war in Ukraine broke out last year, have also come down and have become somewhat more stable at relatively low levels -- relatively lower levels these days, so again another indicator or another development that has been relatively neutral for ratings in this region, but interest rates and fuel prices are more stable this year, partly also because of growth in the developed or advanced economies have been relatively weak compared to before. And this is dragging down exports for many economies in the Asia Pacific region. Fortunately, domestic demand continued to recover from the COVID lows that we saw. And this, together with travel and tourism activities having rebounded, have been quite helpful in keeping the labor market in relatively good shape, so there is less need for governments to maintain support for the population and for the economy as a whole. And therefore, we have also seen fewer costs on the government's spending in -- coming into this year. Together with the recovery in government revenue that we have seen, so far, in many places and the fact that inflation has come down in recent months, reducing the need for continued government subsidies or support, we do see a decent chance that this year we will see consolidation progressing in many economies that we rate in the Asia Pacific region. And this will help to bring down fiscal deficits compared to what we have seen in the past few years at least. Now the deficit this year, unfortunately, will still remain relatively high, particularly in economies where the political will or ability for politicians to bring down deficits are a bit weaker. And therefore, even as fiscal performances improve on an ongoing basis compared to the past couple of years, we will continue to see debt ratios of general government debt versus GDP go up in this year and perhaps even next year. Nevertheless, if we do continue to see fiscal consolidation progressing of -- continue in the next few years, we will eventually see a stabilization of the debt ratios and maybe an improvement. Now as I mentioned, we have not seen many or any rating action or even outlook changes, so far, this year, but recently we have affirmed quite a number of ratings. And in the next couple of slides, I'll show the few -- a few of the more interesting or more high-profile ratings that we have affirmed in the past couple of months. Now firstly, is Indonesia, which we affirmed in July 4, on July 4. The Indonesian rating was a negative outlook until last year when we changed the outlook back to stable. And that really reflected an improvement in the external accounts which more than offset some weaknesses that we saw during the COVID period on the fiscal metrics. And coming into this year, we have seen even the fiscal metrics are rebounding even as we see exports weakening, but overall the strength of metrics supporting the Indonesian rating is today stronger than last year and definitely stronger than 2 years ago. To a large extent, the improvements that we saw last year were reflective of the stronger coal and palm oil exports partly resulting from higher energy prices and partly also because of the war in Ukraine. Now the -- a trend that we see since 2021 is somewhat more important from a structural point of view because already this year we see palm oil prices as well as coal prices coming down. And exports, therefore, have been weakening compared to last year for these 2 commodities, but we are expecting that metals exports out of Indonesia will continue to be holding up and perhaps even strengthening further, mainly because of the significant nickel reserves that Indonesia has. Now in the past couple of years, these nickel reserves have been helping Indonesia increase its pig -- nickel pig iron exports. Now going forward, with the changes in -- recent changes in the government's policy, we do expect that more and more we will see nickel being used or produced in its more -- purer form in -- as input to electric vehicle batteries, so we may see the shift in -- the change in exports from more pig iron -- pig nickel iron to purer nickel in the near future. And when the EV battery in -- factories come online in Indonesia, we may even see EV batteries being exported out Indonesia and eventually maybe even EVs further down the line. What this means, however, is that industrial competition in Indonesia will undergo a change in the near few -- next few years, helping to continue the improvements in export numbers and therefore the external metrics that we see underpinning the government's ratings. Together with the fact that some of these activities will also contribute to fiscal revenues, we think that on these 2 fronts we could see a further strengthening of our Indonesian credit metrics, which would improve the stability of the ratings at the BBB level that we see today. Now next, we also recently affirmed the ratings on China, in June 28. And obviously there's a lot of attention being paid to economic recovery in China. With the latest release of second quarter numbers, a lot of people have marked down their initial, more upbeat economic projections for China, but nevertheless, nobody is still -- nobody is yet to believe that China will see growth of below 5% this year. Now the weakness that we see recently do not directly affect the ratings. We believe that this is an inflection point. Essentially China had been relying on very -- 2 very important engines of growth in the past, the real estate sector as well as the local government infrastructure building sector. Now these 2 sectors have been the focus of government -- the central government's deleveraging efforts over the past couple of years. And this effort continues today even though we see some marginal easing more recently, but what this means for the Chinese economy is, in the short term, it is unlikely to see much contribution from these 2 traditionally important sources of growth. And the economy, having just come out of COVID, is unlikely to find its feet and turn to a new of -- and bring out a new source of growth, especially perhaps in the consumer sector, just yet, so what this means is that it's no surprise to us that growth is relatively weak this year. And the government essentially has flagged this when they target a 5% growth in the national party -- national government -- national party -- NPC this -- in March this year. Now going forward, the weak points that we see as threatening the ratings is the weakened fiscal performance and weakened fiscal balance sheet of the Chinese government. Now in the latest review, even though we haven't changed the outlook, the fact is the fiscal metrics have weakened. And the debt levels have also weakened, in part due to the more high-pressure economic circumstances leading to what we see as potential risk of contingent liabilities coming from the local government's off-balance-sheet liabilities. Now with the expectations that the economy will at some point turn around, find its feet with stronger sources of growth, improved exports and also some recovery in the real estate and investment front, we believe that some of the deteriorations in fiscal and debt metrics that we saw will turn around. And therefore, that is the reason why we do not see the rating going down anytime in the year or 2 -- next year or 2. However, if the economic turnaround that we look to does not happen and we see growth coming in even weaker than what we project to be the case in next 1 to 2 years, then there's -- a significant pressure could develop on the ratings in next year or so. Now finally -- next, we go to Malaysia, which we -- which ratings we also affirmed in, on June 27. The Malaysian growth story has been a key reason why we continue to keep the rating at A- level with a stable outlook. However, the fiscal metrics has indeed weakened. And we have not seen a very strong real -- or strong effort by the government to try to bring the deficits in with the economy recovering from COVID. Now we see this largely in part -- largely reflecting the state of political uncertainty in the country. Although we do have a coalition government in today, there continues to be a lot of chatter about how long this government can last and whether one party or another will [ pull up the ] government. From this perspective, we do think that a stronger push towards fiscal consolidation and improvement on the government's debt metrics would only likely take place if the government were to consolidate and strengthen in -- and reduce political uncertainty going forward. And as I'll speak on a bit further, the state elections that are coming up may have some implications for this. Next, we also affirmed Vietnam in the middle of June. To a large extent, Vietnam has been a beneficiary of the U.S.-China tensions, with quite a number of factories relocating or increasing their exports out of Vietnam. However, this year, we do see some weakness partly because the global economy is weak. And we saw in the previous chart that Vietnam's exports have actually fallen quite significantly over the first few months of this year. Importantly also, we also -- we have seen some weakness in the real estate sector with some real estate developers running into financial troubles. We have not seen a firm turnaround in that story yet, but at least for the moment, we don't see the weakness in the real estate sector likely to materially affect the financial sector. Nor do we see the government having to come in, in a big way to help to support the sector, but certainly this is a development that bears watching. But as I said, for the time being, we do see things somewhat improving. And hopefully, with the low interest rates that we're seeing, there could be some positive developments coming out of that. We affirmed India a bit earlier, in May, but I do see a lot of questions coming in for India. And I -- my colleague Andrew will speak on the Indian story, credit story, in a bit after my presentation, and therefore, I'll just skip over this one. Now we affirmed the ratings on Japan quite some time ago, in April. However, this continues to be a relatively -- there continues to be quite a lot of interest in Japan mainly because people are looking to a change in monetary policy stance by the Bank of Japan. Now this is the look -- this is the U-curve of the Japanese government bonds that I just took a snapshot of on Monday. As you can see, compared to a month ago and a year ago, the short-term interest rates haven't actually moved much. They're more or less at the same level where they were a month ago and basically a year ago. However, on the longer term, we do see spreads -- or rather interest rates increasing and -- from 10-year -- from the 5-year mark onwards. To some extent, this suggests that most market participants do not see interest -- short-term interest rate changes in Japan, at least for the remainder of this year. However, there is -- it does imply that the -- because the high -- interest rates at the high end or -- longer durations have been going up, it does suggest that some people do see a small chance that the U-curve [ control could come down ] and -- at some point in the next few months, if not in the next year or so. Now what this has for credit -- or what credit implications this has for the Japanese government is mainly through economic -- is economic impact. Because the support for the Japanese government ratings has been very weak coming from the fiscal and debt front, we do not see a further deterioration affecting the ratings on the government. However, if the Japanese interest rates were to rise and affect a large swath of borrowers in the private sector and, as a result, causing the economy to slow very significantly, we could have some impact on the ratings, but at this point we don't see this being a material risk. Now finally, of course, there's always risks. And like I said, the help -- the drop in fuel prices has been very helpful for sovereign ratings in the region, especially on the external metrics. We have seen quite a number of current account deficits coming down into this year mainly because fuel prices have come down. And therefore, the amounts spent on fuel imports have materially declined, but for whatever reason, if we do see the risk of fuel prices coming back up again, especially back to levels that we saw in the middle of last year, then again this could pose the risk to quite a number of ratings, especially through the external and perhaps even the fiscal channels, if the governments who -- faced with higher oil prices decide to increase subsidies again. Next, we have elections going on or just recently passed in a number of economies. And in some of these places, they could have a significant geopolitical or political and perhaps even credit impact going further down the line. Now we have had the national elections in Thailand since May, but we still do not have a new government. And in fact, we still do not know who the Prime Minister will be. At least I don't know just coming into this webcast, but the latest development this morning has been that the constitutional court appears to have suspended the leader of the movement forward party that got the most seats in the most recent elections. And now he is -- effectively therefore is ruled out of the Prime Minister's position, but who becomes the Prime Minister is quite important for political and social stability going forward. Now since 2006, we've had a long period of relative instability on political front in Thailand. This has not materially affect the economy in such a way that we have to bring the ratings on the government down. However, it has means -- it has meant that government after government since 2006 have not been able to focus very much on trying to bring up reforms or changes in the country to bring the growth trajectory further up. And as a result, Thailand has been one of the slowest economy, growing economy, in the ASEAN region. The importance of the next Prime Minister is that -- essentially the Thai electorate has expressed a view that they desire some changes. I think, from what has been happening, the Thai political establishment has not yet been ready to go, as far as what the electorate wants. However, they -- if they do not -- they are not seen as conceding to some extent to the wishes of the electorate, there could be ongoing political instability continuing in the -- in Thailand. And therefore, again, political attention to some of the reforms and changes that are needed to bring the Thai economy forward may be delayed further, so this again over the long run could affect the ratings through the economic metrics and perhaps the fiscal metrics. Now in Malaysia we had a national elections passed. We have a government -- a coalition government, but going forward in the next few weeks, we are going to see 6 state elections. Now of course, whatever the outcome of the state elections, which are -- most people, just based on the recent national elections, believe will be won half-half by both the national coalition as well as the opposition coalition, so it is unlikely to have a direct impact on the stability of the government. However, the amount of votes or the number of votes that the national coalition or the opposition coalition garner over the state elections could have a bearing on the decision of parties to -- whether to stay in the government or leave the government at some point in time, so this again has implications for the stability of the coalition government and therefore the time line or timing as to when the government would be able to carry out more forceful fiscal consolidation and other reforms that could benefit the metrics. Now Indonesia. We are going to see a new presidential election next year, a big one after we had 2 terms of the Jokowi administration, but in the case of Indonesia we have seen that the structural political story is such that, whoever is President, whichever party controls the parliament, we are likely to see more or less centrist policies on the economic front. And while there may be some deviations or changes in terms of who is the minister in terms of finance and who's the President, we are unlikely to see the fiscal trajectory change significantly so much that we -- it may affect the credit ratings on the government directly. However, we do see the economic [ underpinning ] as being more important. And therefore, we -- the export story as well as the tech story coming out Indonesia's foray into the nickel mining and EV industries will be very important for the stability of the metrics. Finally, on Taiwan, we are also going to see a presidential elections. The one key risk of Taiwan is we have a new President who leans more towards independence of -- official independence and therefore triggered a crisis in the -- across the countries, which obviously will have significant impact not just for China and Taiwan but for many sovereigns and governments around the region. However, from what we have seen in the past few months since the -- or at least since last year actually, with the Pelosi visit, the Taiwanese electorate have been very much concerned about the risk of war since that visit. And this has pressured all politicians into focusing on stance or political stances that favor peace -- or continued peace across the Taiwan straits. And it is our expectations therefore that, whoever comes out of the Taiwanese -- as President in the Taiwanese elections, the new President is unlikely to move Taiwan in a direction that could trigger a conflict, but in the meantime, the fear of a conflict has -- already has an impact on the Taiwanese economy. We are seeing some investments being redirected out of Taiwan, into other places. We also have seen risk averseness on the part of some people who would have otherwise invested in Taiwan. And therefore, to the extents that tensions remain high across the Taiwan straits, it could be a negative for the Taiwanese ratings through the economic metrics. Now finally the U.S.-China tensions appear to have eased somewhat with the visits by -- of U.S. officials to China. However, a U.S. election is upcoming. And we don't think that tensions between China and U.S. could remain as stable as they are, or at least will not improve materially from the current status, because there is some broad political consensus that China is -- should be seen as a strategic [ foe ] or at least a competitor in U.S. And it's unlikely that in the run-up to a presidential elections we likely see official stance towards China ease in a very material way. Now finally or just to remind you. These are the ratings we have in the Asia Pacific region. As I mentioned, we have a stable outlook on practically all of them. And if you have questions about any of this, please do remember to post in the Q&A box. And with that, I hand it back to Philip.

Thanks, Kim Eng. Now we're going to turn to questions submitted from the audience.

[Operator Instructions] There's heaps of India questions, so I'll try and break them up. So Andrew, do you think the general elections due in '24 and the impending assembly elections in India would lead to increased expenditure, thereby expanding fiscal deficit? And maybe together with that, is the fiscal profligacy of the Indian states a concern? And what impact does it have on the outlook, Andrew?

Sure. Thank you very much, Philip. First off, regarding the elections in India, our expectation is that major new reforms in the country are probably unlikely right up through the election cycle and until the 2024 parliamentary elections are over; after that, perhaps before momentum could pick up, particularly if there is a very strong mandate for the next government. Now regarding the fiscal impact of elections, our expectations remain for the general government deficit to be consolidated down to around 8.9% of GDP this fiscal year, from about 10% of GDP in the outgoing fiscal year. And to meet that figure, we anticipate that the central government will meet its own modestly lower fiscal deficit target and also that state governments will be consolidating their finances gradually over time too. I'd also note that, even if we see a little bit of a boost to expenditure in the election year, the run-up to the elections, revenue growth also remains healthy in India. And that has been supporting this gradual pace of fiscal consolidation that we observe as well. Now regarding the state's finances in particular, in India we see that the central government certainly runs a sizable fiscal deficit every year, but also in aggregate the states are doing so as well. And this tends to sum to like approximately 3% of GDP, plus or minus, depending on the year. When we forecast our general government deficits over the next 3- to 4-year period, we do expect for the states to continue to run aggregate deficits in that range, probably more between 2% to 3% of GDP in the future, as finances continue to heal at the margin but would also note that certainly this quantum is taken into account in our ratings assessment, which means that where we have the outlook at stable currently on the BBB- ratings, that is building-in the expectation that we're going to see combined high general government deficits in the country that are averaging somewhere between 7% and 9% of GDP, with a significant component of that being those state-level deficits. Back to you, Philip. Thanks.

Thanks, Andrew. Next one, perhaps for YeeFarn, one on Philippines. What's your outlook for the Philippine economy? And what are the key risks to the Philippine ratings, YeeFarn?

Thanks, Philip, for the question. So in terms of growth outlook for the Philippines, we are projecting growth to come this year at 5.9%; and also, next year, for growth to continue at around 5.9% as well. First quarter Philippines growth actually surprised [ kind of a few of us ] on the upside. First growth -- first quarter growth came in at 6.4%, which was still fairly high given the fact that we thought there could be some cooling off given the very strong growth of 7.6% last year, but that momentum seemed to have been carried on. And because of that, that's the reason why we are still forecasting a relatively high GDP growth of 5.9% for the Philippines for this year. Now in terms of the credit factors that we looked at that might impact the ratings, the downside -- our downside scenario is that the ratings could potentially be lower if we see that this economic recovery starts to falter, leading to some erosion of the country's long-term growth trend and, alongside that, also possible associated deterioration of the government's fiscal and debt positions. Downward pressure on the ratings, if you wanted to see actual numbers, is if we find the annual change in the government's net general government debt are consistently higher than 4% of GDP and if we also see that the general government net debt stock is higher than 60% of GDP or if we see that interest payments starts to become higher than 15% of the government's revenue on a sustained basis. At the same time, if we see that there is [ persistently large ] current account deficits, this could also lead to a structural weakening of the Philippines' external balance sheet, which may indicate further downward pressure on the ratings.

All right, thanks, YeeFarn. One for Anthony, on Australia. Anthony, what's the impact of higher interest rates in Australia given that household debt is very high? Anthony...

Thanks, Philip. We think that households and the economy are well placed in dealing with raising -- rising interest rates. And an estimated 800,000 mortgage payers are expected to move from low interest rates to much higher interest rate mortgage payments in the next 6 months. And that's as they're rolling off fixed low rates into -- mortgages entered into during COVID, yes, and now they're entering into the higher interest rate environment with variable mortgages. Many of the households have built large savings during the pandemic, and that's going to give them a bit of cushion to help pay for the rising rate. And key to all of our forecasts and key to household balance sheets is that unemployment is at historical lows. We are forecasting that will rise roughly 1%, but at 4.4%, 4.5%, it's still well below historical levels. Saying all of this, we kind of expect that, at higher interest rates, we will hit economic growth this year. That is fiscal '24 that we're currently in. As mortgage payments rise aggressively, we expect consumption and investment will be weaker than it has been in the past. And that means economic growth will slow, still remain positive. And it's going to be supported significantly by very strong immigration intake, so given that interest rates have gone up quite aggressively here and everywhere else, we do think that the Australian economy and households are well placed to manage with that at the moment. Thanks, Philip.

Thanks, Anthony, yes. Andrew, I'll lump a few together on India. So what do you think will be the trajectory for privatization against a backdrop of elections in India in 2024? Perhaps given the monsoon trend in India, do you expect any delay in the reserve bank cutting interest rates, any change in the inflation forecasts, Andrew?

Sure. Thank you, Philip. Looking at the privatization expectations for the government, I think for us this continues to be rather modest in nature. And perhaps you could observe a little bit of a slowdown therein around the election period as well, but for the most part, we anticipate that annual receipts through that privatization efforts that the government are going to remain roughly in line with where they have been over the past 5 to 6 years. And that's incorporated into our forecast too for the ratings. Regarding the monsoon performance, so far, and how that may affect the interest rate environment in India as well as the inflation environment, we know the central bank has mentioned that they would like to see further progress in terms of the management of inflation. And we observe that perhaps there is some additional pressure coming through the CPI channel from food prices in particular. Again even if the monsoon is perhaps an average one this year, it could be uneven, which could possibly put a little bit of a floor under -- or cause some upward pressure to come through in the food price category. So far, we haven't, based solely on monsoon developments, changed our inflation forecasts for the year, so we do anticipate that inflation is going to end the period in India, and that's the fiscal year, if you will, at 5%. And we expect that, by the end of the fiscal year, the central bank will have cut [ once ] or by 25 basis points from its current policy rate of 6.5%. Back to you, Philip. Thanks.

Thanks, Andrew. YeeFarn, a topical one on Singapore: Do you foresee the Singapore credit rating to be impacted given the recent news and the upcoming elections?

Thanks, Philip. Interesting question. No, yes, we don't expect this having impact on Singapore's credit ratings. Our assessment on Singapore's institutional assessment continues to be at the highest level. We believe that political institutions in Singapore are known for their stable and proactive policymaking. They have a strong track record of steering the economy through various financial crises. The government maintains a pragmatic, forward-looking and very long-term approach towards policymaking, which helps to maintain sustainable public finances. Therefore, we don't believe these recent political issues to have any impact on the ratings. Back to you, Philip.

Thanks, YeeFarn. Perhaps one for Kim Eng, on Vietnam. Kim Eng, do you think the external headwind would disappear for Vietnam next year? In other words, would the real growth rate and current account balance get normalized next year? Together with that, perhaps, do you see Vietnam resolving the legislative and regulatory challenges in the infrastructure sectors and that will encourage more FDI, Kim Eng?

Okay, thanks, Philip. So yes, we do think that next year we should see some normalization of Vietnamese exports. I mean the decline that we saw this year is not confined to Vietnam or specific to Vietnam. We have seen across the region and even elsewhere exports being relatively weak. And as I mentioned in my presentation, it's mainly because of the relatively weaker growth that we saw in the developed economies that are the main markets for many of the exports out of Vietnam. Now second thing is also that, this year especially, we are seeing a downturn in electronics cycle. And Vietnam exports a lot of electronics, so with -- and hopefully, since it's a cycle, it will go down and it will go up again. And by most estimates, I think, by the end of this year, we should see a turn, upturn, in the economic cycle as well as the electronics cycle, which should benefit the exports out of Vietnam. Now this year, we also have some constraints on growth in Vietnam mainly because of some political issues. And also, as I mentioned earlier, the real estate sector was having some troubles. Now hopefully, by the end of this year, both political uncertainty as well as troubles in the real estate sector would have eased and therefore position them to become a positive contributor of growth forward again. With that, we do believe that both the exports as well as economic momentum should turn more positive as we come to the end of this year. Effectively -- sorry. Legislative-wise, it's difficult to say because, at the end of the day, it ties in with the political events that I mentioned just now. However, Vietnam is less, I guess, constrained by its infrastructure compared to some of its neighbors and some of its competitors in attracting FDI, especially in the manufacturing sector, which is why we have seen such inflow coming into the country and also the strong exports that the economy has seen until this year. So we believe this to be -- continuing to be the case, but of course, as the question pointed out, things could move a bit faster. Especially on the regulatory and legislative side, the government could speed things up. Back to you, Philip.