(The 16) Fitch : Solar industry ,Hong Kong, US military costs, India & fighterjets, Central Bank of India

1-Clouds over the solar industry
2- Hong Kong Budget Stimulus Consistent With Fiscal Prudence
3-Impact of Proposed U.S. Military Realignment Will Vary
4-Indian Jet Competition Shows Emerging Markets Importance

5- SBI Capital Injection is Welcome Boost as Bad Loans Rise

1-Clouds over the solar industry


2- Hong Kong Budget Stimulus Consistent With Fiscal Prudence

The stimulus measures announced by Hong Kong are consistent with the Special Administrative Region’s strong record of fiscal prudence and do not threaten its exceptionally strong overall public finances, says Fitch Ratings. These are a key factor underpinning our ‘AA+’ rating and Stable Outlook.

The HKSAR government announced Wednesday a HKD80bn stimulus package, largely consisting of one-off relief measures. The package is large, and means the government is projecting a deficit of HKD3.4bn (or 0.2% of GDP) in 2012-13, compared to an estimated windfall surplus of HKD66.7bn (or 3.5% of GDP) in 2011-12.

However, the budget also highlights the government’s long-term commitment to fiscal prudence, with the government estimating fiscal reserves at HKD670.4bn by end-March 2017 (27% of GDP).

As we observed when we affirmed Hong Kong’s rating in October last year, the maintenance of large fiscal reserves gives the government valuable fiscal firepower, and provides important backing for the linked exchange rate system.

The stimulus measures represent a shift of emphasis towards countering a potential sharp economic slowdown, compared with last year’s focus on risks originating from a housing bubble. They could boost private consumption and appear to be an appropriate counter-cyclical policy to help Hong Kong’s open, trade-intensive economy cope with rising risks of a global economic slowdown.

The government indicated that new budget measures, which are largely aimed at preserving jobs and supporting incomes, should stimulate the economy by 1.5 percentage points in 2012, although it forecasts real GDP growth to slow to 1.0%-3.0% in 2012, down from an estimated 5.0% in 2011.

Wednesday’s budget suggests the authorities are confident they have done enough to guard against the risks of an asset-price bubble, particularly in the housing market, and inflation. This has enabled them to stick with their previous strategy of increasing the supply of residential property in the private and public housing sectors.

The new guarantee commitment of HKD100bn provided under the SME Financing Guarantee Scheme, with a higher loan guarantee ratio of 80% (up from the current 70%), could encourage bank lending to SMEs. But we think its impact will very likely be immaterial given the small size of the programme (about 2% of system-wide loans) and the fact that the guarantee is unfunded, and therefore does not address banks’ tightening liquidity positions.

3-Impact of Proposed U.S. Military Realignment Will Vary

Fitch believes the proposed military cuts could be negative for some localities and neutral for others while possibly creating opportunities for a few. The Pentagon proposal to close domestic bases is part of a broader reorganization of the military projected to save $487 billion over 10 years. Most of the proposed closures are slated to affect Army and Marines bases. We expect this proposal to meet with significant challenge in Congress in this election year.

If approved by Congress, the greatest negative impact could be felt in rural communities where bases represent a large portion of the population. One example is in Geary and Riley counties in Kansas. Fort Riley straddles these counties and has approximately 25,000 residents. The counties as a whole have some 105,000, according the most recent census. The Army estimates that Fort Riley contributes $2.2 billion to the Central Flint Hills Region, of which over $1.4 billion is in salaries.

We would expect a smaller financial impact on larger communities with greater population and business independence from the local base. According to the 2010 census, Fort Belvoir in Fairfax County, VA had a population of 7,100, while the county had a population of just over 1 million. Fairfax County’s proximity to Washington, D.C. and thriving commercial interests make it independent of the base. For example, Tysons Corner is the largest suburban business district in the nation, with 25,700,000 square feet of office space.

Population is expected to have less of an impact on cities or regions if the base’s location is attractive for redevelopment. Marine Corps Base Camp Pendleton is a prime example. It covers 200 square miles of land, including 17.5 miles of Pacific shoreline in San Diego County. The base’s population is large at 60,000, but San Diego County is home to over 3 million.

4-Indian Jet Competition Shows Emerging Markets Importance

The competition to supply fighter jets to India demonstrates the growing importance of emerging markets to the defence industry in developed markets at a time when their domestic revenue base is under pressure as a result of widespread fiscal constraints. The Indian Ministry of Defence announced on 31 January 2012 that it will enter exclusive negotiations with Dassault to purchase 126 Rafale jets in a deal that may be worth up to USD20bn to the manufacturer over the life of the contract,

This represents one of the biggest defence deals in recent years, but it is likely to be only one of many as far as defence procurement by emerging market countries in the coming two years or so is concerned. In the fighter jet segment alone, up to a further 340 fighters could be ordered by emerging markets before the end of 2014 in what may prove to be boon for western defence companies suffering from weaker local demand.

Of the new fighter jet orders which are expected to be announced in the coming two years, the majority are likely to be in emerging markets. The most significant include Brazil, South Korea, the UAE, Qatar and Oman, which together could order up to 300 aircraft. Other, smaller, orders are also expected from Malaysia, Bangladesh and Bulgaria, among others.

Conversely, few large orders in the short term are expected from developed countries, most of which are focusing on reducing their defence expenditure as part of wider efforts to rein in budget deficits.

The robust outlook for emerging market demand is not limited to fighter jets, but evident across the wider defence sector also, with big orders expected in the defence electronics segment, among others, in the short term. Nevertheless, the fighter jet segment demonstrates most acutely the recent shift in demand from traditional western markets to emerging countries, driven as much by the increased financial capacity of certain emerging countries as by modernisation requirements.

The strong growth in emerging market demand for defence equipment is a welcome respite to western military manufacturers who are increasingly seeing their revenue under pressure from cuts to defence spending in their indigenous markets. For example, in 2011, we estimate that defence spending in Western Europe declined by approximately 4% – 5% from 2010 levels and may likely decline further in 2012. Given that it is unlikely that defence spending will see a reversal of recent trends, we believe that in the medium term, the reliance on emerging markets for the defence sector will continue to grow. Nevertheless, for numerous reasons including political factors, pricing policies, product suitability as well as contractors existing level of involvement in a certain country, it remains uncertain which western defence manufacturers stand to benefit the most from this growth.

5- SBI Capital Injection is Welcome Boost as Bad Loans Rise

01 February, 2012 5:59 AM
India’s planned capital injection into State Bank of India provides a judicious boost to the group’s balance sheet in the face of rising non-performing loans and confirms our expectation that the bank will continue to receive necessary support from the state. While the injection should take SBI’s core Tier 1 ratio to just above 8%, we believe a further capital increase is likely in order to bring the bank at least into line with other government-controlled lenders.

A weakening operating environment in India is likely to push up non-performing loans in 2012. Banks will face a sharp increase in the volume of restructured loans due to their exposure to infrastructure projects and the struggling aviation and power sectors. Rising credit and pension costs are also likely to limit SBI’s ability to boost capital on its own.

While we have always factored in a high probability of government support for SBI, which is reflected in its ‘BBB-’/Stable Long-Term Issuer Default Rating, we noted in January 2012 that the viability ratings of government banks could come under pressure if expectations of an equity injection by the government were to weaken.

We believe that the relatively long time taken to agree a capital injection (SBI’s core Tier 1 was below 8% for much of 2011) was due to administrative delays in deciding on the size and form of a capital injection, rather than any indecision over whether to provide the additional capital.

The INR79bn that the government is expected to provide through the acquisition of equity shares is equivalent to around 12% of the bank’s FY11 equity and should lift SBI’s core Tier 1 ratio to around 8.1%, according to Fitch’s calculations. This would still be below many Indian peers and SBI’s historic core Tier 1 level of between 8.5%-9%.

Capitalization also remains relatively tight for the group’s current rating, given its potential for future growth and the bank’s position as India’s largest bank as well as the primary banker for central and state government entities.

We therefore expect further measures to push the core Tier 1 level to around 9% next year, potentially through a rights issue that would include minority shareholders as well as the government. A further capital injection would also be in line with our understanding that the government is working on a 10-year plan to capitalise its banks, targeting a core Tier 1 ratio of at least 8%, but possibly higher for the larger, systemically important lenders.

©2012 Fitch