Indonesia’s commodity producers to drive emerging markets earnings growth

COMPANIES in Indonesia are expected to report the most earnings growth among its Asia Pacific (Apac) emerging market (EM) county peers due to the country’s large proportion of commodity producers that are benefiting from high spot prices this year.

According to a recent report by Moody’s Investors Service, Indonesia will post the highest earnings growth of 56 per cent, followed by India and Thailand at 51 per cent and 36 per cent, respectively.

The credit ratings agency is expecting EM companies to record a “bumper year” of aggregate earnings growth in 2022, reflecting improved operating conditions and demand recovery.

“On aggregate, the Ebitda (earnings before interest, taxes, depreciation and amortisation) of Moody’s-rated EM companies in APAC will grow 28 per cent this year from 2019, while rated developed market (DM) companies’ earnings will grow 14 per cent in the same period,” said Moodys’ vice president and senior analyst Rachel Chua in a press statement on Monday (Sep 5).

Chua however cautioned that EM companies have taken on more debt relative to earnings growth and expects their average leverage to rise to 5.1 times in 2022 from just 4.3 times in 2019.

Moody’s nonetheless expects Indonesia to see overall strong improvement among its peers as the earnings of the country’s metals, mining and steel companies are projected to rise over 260 per cent this year from 2019 levels to offset its debt levels, which are estimated to grow by only 58 per cent.

In terms of earnings to leverage, Moody’s says India’s improvement will be the strongest among EM countries under its coverage due to its projected earnings growth of 51 per cent and leverage improvement of 1.6 times – a result of improving leverage for 17 of the 19 rated companies in India.

“Rated companies’ leverage will improve as a result of stronger earnings in all countries except China,” stated the company in its report.

“Although aggregate Ebitda will rise 21 per cent in China, leverage will weaken because of debt growth. In particular, earnings for Chinese companies in the oil and gas, and metals, mining and steel sectors will increase 45 per cent, but the sectors’ corresponding debt levels will rise 47 per cent.” 

While the agency sees an overall earnings rise in EM countries led by the commodities sector, it views gaming companies and property developers as outlier due to China, where travel restrictions remain in place and homebuyer confidence continues to weaken.

“Property developers will see an increase in leverage positions due to the decline in earnings. Leverage of the gaming sector will weaken to over 30 times in 2022 from 3.1 times in 2019 because of a slow recovery of earnings, particularly in China,” said Moody’s of the Apac EM companies under its coverage.