(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings ).)
Key Takeaways
- Strains on financing conditions, economic output, and corporate planning as a result of increased tariff uncertainty could raise the Asia-Pacific (APAC) default rate to 2% through March 2026.
- If the current tariff pauses and levels last, we could see defaults remain low and in line with current levels in our optimistic outcome of zero by next March.
- However, if the final tariff levels swing back to their higher, pre-pause levels, or negotiations fail to reach conclusion, an uptick in uncertainty later this year could lead to our pessimistic projection of a 4.25% default rate through next March.
- Recent legal challenges to many of the Trump administration's tariffs have put an additional layer of uncertainty into the mix, with an even less clear view on possible outcomes than existed previously.
S&P Global Ratings Credit Research & Insights expects the APAC trailing-12-month speculative-grade corporate default rate to rise to 2% by March 2026, from zero in March 2025 (see chart 1). The APAC speculative-grade default rate has been at zero since last August, but increasing tariffs and related uncertainties could push defaults higher over the near term. These developments have thus far narrowed decreased market access for weaker issuers, raised overseas financing costs, and in some cases, caused sharp swings in foreign-exchange rates. In addition, possible negative impact on economic growth and business operations in an export-heavy region pose risks in the near term and afterward. Fundamentally, there are currently very few speculative-grade issuers rated 'B-' or lower, which could keep the default rate below its 3.1% long-term average even in the current environment, at least through next March. However, the longer tariff negotiations persist beyond their current pauses, or should they deteriorate, credit stress will increase, potentially leading to higher default rates in the intermediate term.
Chart 1
In our optimistic scenario, we forecast the default rate could remain at zero. This scenario hinges on previously proposed tariff levels, prior to the recent 90-day pauses, to be scrapped following these pauses. In particular, the future for U.S.-China tariff levels will be key to the region's overall economic performance, given their potential impact on China's growth and its impact on the regional economy. A default rate of zero would be dependent on a best-case outcome of lower tariff levels as well as an improvement in China's economy and consumer spending, which has been strained by the property sector slump since 2021 as well as the current threat of tariff disruptions.
In our pessimistic scenario, we forecast the default rate could rise to 4.25%. This scenario is rooted in the assumption that the U.S. returns to April 2 tariff levels after the 90-day pause and that specific levels against China rise to higher levels than are currently in play during their separate pause. While we don't make specific predictions over how high those could go, they had reached 145% with responding tariffs by China at 125%. That said, Chinese issuers represent less than 10% of the speculative-grade rated issuers in APAC, with most of those in the 'BB' category. Issuers from the high-tech and metals sectors are expected to continue facing elevated tariff rates of 25%, and the high-tech sector currently leads among the cohort rated 'B-' and lower.
A Protracted Stretch Without Defaults Is Likely To End
Thus far in 2025 and despite heightened uncertainty, the APAC region has not seen any speculative-grade (or any rated) defaults since August 2023 (see chart 2). We note that in our country classifications, it is the issuer's country of incorporation that serves as the basis for geographic classification. That said, some issuers with their corporate headquarters in APAC have been incorporated in Bermuda or the Cayman Islands. But even if we consider those issuers, there has only been one default in 2023 and one in 2024. Much of this decline stems from defaulted Chinese companies in recent years not subsequently re-emerging. In fact, only one issuer out of China currently in the speculative-grade category had an initial rating since 2020. This arguably limits the direct impact of Chinese firms in terms of future defaults. However, the larger impact from on the regional economy could cause more widespread defaults across countries to accelerate over the next 12 months, particularly if tariff levels return to their April 2 levels or higher.
Chart 2
Market Sentiment Soured Quickly After Wave Of Proposed Tariffs
The market reactions to the April 2 tariff announcements by the Trump administration were felt globally and across asset classes. Equities lost substantial ground over the following seven days, speculative-grade issuance largely disappeared during most of April, and bond spreads widened quickly. Speculative-grade bond spreads in APAC (excluding Japan) have trended wider than those in the U.S. since at least the 2020 pandemic and wider during the 2021-2022 strain on Chinese homebuilders. The gap was closing in 2024, but Asian bond spreads would see a larger widening in April, reaching nearly 1,000 basis points (bps) on April 9. And while both U.S. and APAC speculative-grade bond spreads have since tightened as more positive (if temporarily so) news flows in during May, spreads in APAC remain much higher than those in the U.S., by roughly 400 bps, indicating elevated risk aversion in APAC.
Chart 3
Unsurprisingly, alongside wider spreads since April, speculative-grade bond issuance disappeared in the month as well (see chart 4). Through April, only $3.4 billion in speculative-grade bond issuance in APAC came to market, less than half the level for the same month last year. Issuance has rebounded somewhat in May, but thus far it has only involved three deals totaling $1.07 billion. This slower rebound may also be a reflection of greater apprehension across APAC markets when compared with $23 billion seen thus far in the U.S.--the largest monthly total for speculative-grade bond issuance in 2025 thus far.
Chart 4
Despite the rather paltry amount of speculative-grade bond issuance so far this year, near-term maturities have seen some declines in the total outstanding amount due 2027 relative to October 2024 (see chart 5). Some of this could be due to upgrades out of speculative-grade territory since then, or issuers are finding alternative funding options outside of public bond markets. Still, the total reduction in maturing debt through 2027 has only been between $1.5 billion and $2.0 billion. Compared with $10 billion still due for the remainder of 2025, issuers will either have to face primary markets at higher rates or seek out other sources of funding through bank loans and private market alternatives, with private markets often charging higher interest rates than public bond markets. We acknowledge that these estimates may be slightly higher than those as of April 1 due to normal reporting lags.
Chart 5
About 80% of outstanding speculative-grade debt is in U.S. dollars. Since the start of 2022, the dollar has strengthened to its highest levels in decades, raising local currency financing costs. But since April 2, the dollar has depreciated against many Asian currencies (see chart 6), helping lower the effective cost of the high proportion of dollar-based debt among speculative-grade issuers.
Chart 6
On the flipside, however, these sharp increases in local-currency rates could weaken export competitiveness. It remains to be seen if the recent slide in the U.S. dollar will be sustained if the larger tariff situation settles calmly. Regardless, having entered the year at decade-high levels, some correction was not surprising, particularly considering the growing pile of Treasury debt in recent years.
Recent Credit Trends Remain Positive For Rated Entities
Based on recent rating trends, future speculative-grade default pressure is historically low in APAC, in our view. The period of four quarters ended March 31, 2025, has been one of the most positive ones on record, with net rating actions at 16% (net rating actions are defined as the percentage of upgrades minus the percentage of downgrades). This means that during this period, speculative-grade issuers saw net upgrades to one of the highest rates in after the Great Financial Crisis (see chart 7). The positive tilt to rating actions has been helped by four consecutive quarters of no downgrades into the 'CCC' or 'C' categories through March 31. That said, the net bias (the percentage of issuers with a positive outlook or CreditWatch minus the percentage with a negative outlook or CreditWatch) has moved into negative territory after a positive reading at the same time last year. It is common to see a negative net bias for speculative-grade issuers as a group, but this is still a deterioration relative to a year ago.
An increase in negative rating actions tends to precede a rise in defaults by two to three quarters. This was the case in 2009 and 2021, when the net downgrade rates were below -10%. During these years, the net bias was also more negative due to a much larger proportion of negative outlooks and CreditWatch negative relative to positive ones. In both years, defaults either peaked later (as was the case in 2009), or began to rise after a previous decline (as was the case in late 2021).
Chart 7
Given the lack of downgrades, particularly into the 'CCC' and 'C' categories through the first quarter, the overall proportion of rated entities within those categories is very low, which should also limit the number of defaults in the future (see chart 8).
Since the end of March, there have been downgrades into 'CCC/C', which won't be captured here. This includes ANI Technologies Pte. Ltd. ("ANI Technologies Downgraded To 'CCC+' On Return To Cash Burn; Outlook Negative," May 9, 2025) And Hopson Development Holdings Ltd. ("Hopson Downgraded To 'CCC' On Rising Nonpayment Risk; Outlook Negative; Ratings Withdrawn At Issuer's Request," April 1, 2025). However, the latter issuer is incorporated in Bermuda, so not included in this study's population (though we note its corporate headquarters are in Hong Kong).
Chart 8
In terms of where the lowest-rated issuers ('B-' or lower) are located in the region, they're spread across multiple locations, but Australia and New Zealand currently lead with a combined 42.9%. The remainder, and the majority, is fairly well distributed (see chart 9). From a geographic perspective, the high concentration of weaker issuers in Australia and New Zealand might bode well, considering our current expectations are for stronger growth in both countries during 2025 and 2026 than the 2024 rates of 1.0% and -0.1% for Australia and New Zealand, respectively.
From an industry perspective, many of the weakest issuers also come from sectors which could either be more directly impacted by U.S. tariffs, or which still have some residual weakness after the property sector strain in the region in recent years (see chart 10). Consumer products and high tech sectors could prove more vulnerable than other sectors given their high export reliance, while within homebuilders/real estate, there remain some issuers at 'B-' and lower from China. These areas could pose greater default risk in the near-term, though default risk is certainly not limited to these sectors.
Appendix: How We Determine Our APAC Default Rate Forecast
Like the U.S. and European counterparts, the default rates and projections included here correspond to the populations analyzed in our annual default studies. For more information on our approach, see (2024 Annual Global Corporate Default And Rating Transition Study). The trends shown here will correspond to issuers' location of incorporation, which may produce different results than those based on issuers' location of corporate headquarters. This forecast applies only to speculative-grade-rated issuers in the region. Default performance among the larger population of corporates in the region (including unrated entities) would likely be noticeably higher than the rated population.
Our APAC default rate forecast is based on current observations and on expectations of the likely path of the regional economy and financial markets. In addition to our baseline projection, we forecast the default rate in optimistic and pessimistic scenarios.
We determine our forecast based on a variety of factors, including our proprietary analytical tool for APAC speculative-grade issuer defaults. The main components of the analytical tool are economic variables (GDP, for example), financial variables such as corporate spreads, the U.S. yield curve (as a proxy global recession warning), and credit-related variables (such as negative bias).
In addition to our quantitative frameworks, we consider current market conditions and expectations. Factors we focus on can include equity and bond pricing trends and expectations, overall financing conditions, the current ratings mix, refunding needs, and negative and positive developments within industrial sectors. We will update our outlook for the APAC speculative-grade corporate default rate after analyzing the latest economic data and expectations.
Regional definition:
We define the APAC region as Australia, Bangladesh, Bhutan, Brunei Darussalam, Cambodia, China, Fiji, Hong Kong Special Administrative Region of China, India, Indonesia, Japan, Republic of Korea, Macao Special Administrative Region of China, Malaysia, Marshall Islands, Mongolia, New Zealand, Pakistan, Papua New Guinea, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, and Vietnam.
Special thanks to our colleagues for their insights and contributions: Christopher Lee, Chloe Wang, Charles Chang, and
Xavier Jean.
Related Research
- Ten Charts That Matter For Asia-Pacific Trade , May 19, 2025
- Global Credit Conditions Special Update: U.S.-China Tariff De-Escalation Brings Some Temporary Relief , May 15, 2025
- China Property Watch: Rebooting An Economic Engine , May 11, 2025
- Global Macro Update: Seismic Shift In U.S. Trade Policy Will Slow World Growth , May 1, 2025
- China Default Review 2025: Tariffs To Cap Tolerance For Big Hits , April 28, 2025
- Economic Outlook Asia-Pacific Q2 2025: U.S. Tariffs Will Squeeze, Not Choke, Growth , March 26, 2025
- 2023 Annual Asia Corporate Default And Rating Transition Study , June 11, 2024
This report does not constitute a rating action.
| Head of Ratings Performance Analytics: | Nick W Kraemer, FRM, New York + 1 (212) 438 1698; nick.kraemer@spglobal.com |
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