Emerging Asia’s growth still strong, but weaknesses more apparent: Fitch
Positive pressure on Emerging Asian sovereign ratings has ebbed as the region’s vulnerabilities have moved increasingly into focus, Fitch Ratings said in a report published yesterday.
Economies with greater external funding needs and less resilient policy frameworks are likely to be more at risk from market stresses stemming from the tapering of the US Federal Reserve’s bond-buying programme. Policy management will be key in shielding sovereign credit profiles from these stresses, particularly for India and Indonesia, Fitch said in the report.
Fitch expects economies in Emerging Asia to grow 6.5 percent in 2014 - still the strongest of any global region, but the slowest pace since the regional crisis year of 1998. If regional giants China and India are excluded, the agency projects growth in Emerging Asia to be 5.1 percent. The main factors weighing on growth prospects, particularly in the ASEAN region, include maturing credit cycles, slower growth in China and falling commodity prices.
Tighter US dollar funding conditions highlight the levels of leverage and the issue of external sustainability for regional economies. However, Fitch thinks the strengthening of sovereign credit fundamentals since the 1998 Asian crisis should see the region navigate these challenges without systemic stress. Seven of nine Emerging Asian sovereigns are on a Stable Outlook.
Two - Malaysia (A-) and Mongolia (B+) - are on Negative Outlook. Malaysia faces the risk of a “twin” current account and fiscal deficit without action to address weaknesses in the public finances - although Fitch acknowledges some progress has been made on this front since the Outlook was assigned in July 2013. For Mongolia, Fitch sees risks to the country’s basic economic stability from current exceptionally loose policy settings.
Greater domestic political tensions in some countries, including Thailand (BBB+/Stable), will bear watching, while India and Indonesia (both ‘BBB-’/ Stable) are due to hold elections in 2014. However, Fitch does not expect political pressures to lead directly to downgrades. The agency expects geopolitical risk to remain in the background - notwithstanding uncertainty over North Korea’s stability and lingering regional territorial disputes.
Domestic political uncertainty could affect credit profiles by impeding reform. Structural reforms that underpin the prospects for sustained growth without major imbalances would strengthen credit profiles, and could lay the foundation for future positive rating actions across the region.