KUALA LUMPUR: The balance of risks for Asia Pacific sovereign credit profiles has shifted towards weaker global growth and away from global financial conditions, Fitch Ratings says.
In its report issued on Tuesday, it said 19 of its 20 sovereign ratings in the region are on Stable or Positive Outlooks, reflecting the cushion provided by strong fiscal and external buffers and shock-absorbers from flexible policy frameworks.
However, the only Negative Outlook in the region is on Hong Kong's “AA” rating after its recent rating action which, the rating agency said, highlighted the relevance of geopolitical risk for some AsiaPac sovereigns.
“Disruptions from the sharp escalation in the US-China trade dispute are darkening the global economic outlook, causing us to revise our global economic outlook (GEO) forecasts
“As well as downward revisions to our eurozone and US GDP forecasts, we now expect Chinese growth to slow to 6.1% in 2019 and 5.7% in 2020, down from 6.2% and 6.0% in the June 2019 GEO, ” it said.
Commenting on the policy responses, Fitch said low inflation and the US Federal Reserve's shift to a more accommodative monetary stance have seen numerous central banks in the region cut interest rates.
It cited India's Reserve Bank of India (RBI) whichwas the first to do so in February, and it has cut interest rates four times, by a cumulative 110bp. Countries with near-term fiscal space, such as Korea, have announced expansionary budgets.
“The direction of sovereign ratings will partly reflect the ability to enact growth-supporting policies while avoiding significant deterioration in fiscal or external positions or increases in macro-economic stability.
“For example, we believe the Chinese authorities will stop short of the type of credit-led stimulus policies that could exacerbate medium-term financial and economic imbalances, but this remains a downside risk to the rating in 2019-2020.
“India's 2019-2020 budget, announced in July, avoided fiscal loosening, but did not signal fiscal consolidation in the coming years, ” it said.
Sovereign-specific factors can affect the capacity to respond to weaker growth and our corresponding credit outlook.
“For example, our revision of the Outlook on Thailand to Positive in July reflects our view that lingering political risks are unlikely to derail sound macroeconomic management.
“An improving record of economic management was also a factor in our revision of the Outlook on Vietnam to Positive in May.
“In contrast, persistent unrest in Hong Kong, which we downgraded to 'AA'/Negative this month, has damaged international perceptions of governance and called into question the stability and dynamism of its business environment, ” it said.
Fitch also said other geopolitical hotspots it was monitoring include frictions between South Korea and Japan, tensions in cross-strait ties between mainland China and Taiwan, and territorial disputes between India and Pakistan.
Volatility in capital flows as markets adjust their global interest-rate expectations remains a risk.
This could maintain pressure on AsiaPac's frontier markets, although to varying degrees their credit profiles have stabilised with the IMF programme in Pakistan, easing of security concerns in Sri Lanka, and strong fiscal performance in Mongolia.