Moody’s Investors Service says that the default rate for Asian high-yield non-financial companies will remain low at 1.9% at the end of 2018 — compared with 4.3% in 2017 — reflecting expectations of broad-based economic growth globally and in Asia Pacific.

“Our expectation of a low default rate also reflects generally stable global funding and liquidity conditions, despite global monetary conditions having started to normalize and expectations of a moderate slowdown in China’s growth rate,” says Clara Lau, a Moody’s Group Credit Officer.

“Moreover, expected default risk across all the sectors of our rated portfolio will be low, as continued accommodative monetary policies and intra-regional financial flows support debt servicing,” adds Lau.

Moody’s conclusions are contained in its just-released report, “Defaults — Asia: Asian high-yield non-financial companies’ default rate to remain low in 2018”. According to the Moody’s Credit Transition Model (CTM), the forecast of a high-yield corporate default rate for Asia of 1.9% in 2018 translates into about three potential defaulters in its rated portfolios.

The forecast reflects Moody’s expectation that the normalization of the monetary policies of the major central banks will continue in a measured manner and liquidity will remain ample, supporting a stable credit environment.

The growing trend of intra-regional financial flows within Asia and the gradual deepening of domestic bond markets also support this expectation of stable funding conditions.

Asia’s default rate estimate is generally in line with the global trend, with the global speculative-grade default rate expected to fall to 1.7% by the end of 2018 from 2.9% at the end of 2017, and those for the US and Europe to be at 2.2% and 1.0% respectively. However, three potential risks could lead to higher default risk for the region.

First, a faster-than-expected tightening in global liquidity, resulting in material asset price corrections and sudden outflows of capital from the region, could lead, in particular, to financial market volatility and liquidity pressure for highly leveraged companies.

Secondly, Asia is exposed to the risk of rising trade protectionism by the US, given the region’s large volume of exports to the US, and this development could have a negative impact on the region’s economies.

Thirdly, intensified geopolitical tension on the Korean Peninsula, albeit with the low probability of escalation, would severely dampen regional growth, and disrupt financial stability and credit conditions.

The Asian trailing 12-month non-financial high-yield company default rate ended at 4.3% in 2017 with six defaulters, higher than the 1.4% in 2016. Four of the six defaulters were Australian companies, and the number of rated defaulters in the rest of Asia remained low at two compared to one in 2016.

Compared to the global and US speculative-grade default trend, the global default rate and the US default rate had decreased to 2.9% and 3.3% at the end of 2017 from 4.5% and 5.6% respectively a year earlier. In Europe, the default rate edged up slightly to 2.5% from 2.3% a year ago.