Moody's: Most Australian corporates to see modest earnings growth in 2016, but pressures remain

Moody's Investors Service says that most non-financial corporates it rates in Australia (Aaa stable) will see modest earnings growth in 2016, but that the continued slowdown in China's (Aa3 stable) economy will pressure the credit quality of companies in the natural resources and mining services sectors.

"Our overall stable outlook for Australia's corporates reflects their solid balance sheets and high levels of liquidity, supported by reasonably resilient macro-economic fundamentals," says Maurice O'Connell, a Moody's Vice President and Senior Credit Officer.

"However, there is a clear divergence between the credit quality of companies in the mining sector, where weak prices and slower global growth are pressuring credit metrics, and those in non-mining sectors," adds O'Connell.

O'Connell was speaking on the release of "Non-Financial Corporates: Australian: 2016 Outlook -- Weakness in Some Sectors".

Moody's says the expected modest increase in earnings growth will be largely driven by an improving domestic economy, with 1.5%-2.5% GDP growth expected in 2016, and accommodative monetary policy.

Growth in China -- although decelerating -- will also remain sufficiently supportive for most corporates, while the weaker Australian dollar benefits exporters and the resources sectors in particular.

By sector, Moody's views corporates in the metals and mining sectors, where commodity price declines continue to outpace cost reductions, as most vulnerable to the slower growth globally. Specifically, solid levels of liquidity and flexibility in capex plans will be critical, says Moody's, as it expects operating cash flows will continue their downward trend.

Moody's positive outlook for the airport sector is supported by improving domestic operating and competitive conditions. While demand remains soft due to the slowdown in the resources sector and the overall economy, the airports are benefiting from lower fuel prices and a weaker Australian dollar.

Moody's further maintains its stable outlook in 2016 for companies in the retail and consumers, and building and construction sectors, as well as for Australian real estate investment trusts (REITs).

While 74% of the Australian corporates that Moody's rates carried stable outlooks as of November 2015, the proportion of ratings with negative outlooks -- 22% as of July 2015 -- indicates that a negative bias remains.

High-yield credits are significantly more exposed to the current economic climate, as reflected by the 35% of negative outlooks on high-yield ratings, compared to 6% for investment-grade ratings.