‘But, rippling effect will be disproportionately higher if war continues for long’

‘But, rippling effect will be disproportionately higher if war continues for long’

The direct impact of the ongoing Russia-Ukraine war on the domestic credit markets appears to be limited as the banking system has adequate liquidity but not the market as a whole, as per a report.

According to India Ratings, overall, the duration and intensity of the war will be the key determinant for the macro and micro risks. Although the direct impact seems to be limited on the credit, based on limited escalation from the ongoing situation, the rippling effect will be disproportionately higher in case the war continues for long.

From a financing point of view, the agency said the domestic banking system had adequate liquidity; but, this does not ensure market and balance-sheet liquidity for the system as a whole. Given the rising uncertainties, high energy prices and cautious sentiment in the capital markets, entities with a weak financial profile may face financing challenges in case the situation worsens, it said.

The agency’s assessment is based on an analysis of the top 1,400 corporates (excluding oil and financial entities) based on their total debt, and it shows a limited-to-moderate impact on their credit profiles.

If commodity prices sustain at the current elevated levels, the rupee may depreciate by 10%, borrowing costs may increase by 1%, median operating margins can be impacted by 100-200 bps for commodity-consuming sectors, the report said.

Their debt at risk (with net leverage exceeding 5x) will exceed by ₹1.2 lakh crore compared with what was anticipated prior to the war.

The agency’s initial assessment indicated that the impact of the war would be largely restricted to small entities and those at the lower end of the credit spectrum.

The impact will be more pronounced on a few sectors and given the relatively small exposure, it will be manageable from a credit perspective, the report said.

Pharma and subsidy-linked sectors such as fertilizers are the most exposed. Pharma has meaningful exports to the Commonwealth of the Independent States/ex-U.S.S.R. states which, coupled with the ongoing pressure on generic pricing in the U.S., can impact the profitability of some drugmakers. But because pharma companies have low leverage on their balance sheets, the risk will be minimal.

The agency also said that higher prices of food, NPK fertilisers and oil were likely to put pressure on the subsidy allocation for fertilizers and LPG. If the government refrains from increasing fertilizer subsidy, the deficit will need to be funded by balance sheets of fertilizer companies, which will deteriorate their credit metrics.

According to the report, rising commodity prices will result in a stretched working capital cycle for small businesses, thereby weakening their debt servicing ability.

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