Asia-Pacific sovereign credit fundamentals could weaken on economic and policy challenges

04 October 2013   Category: News, Asia   By Asia Asset Management

The positive trend of Asia-Pacific sovereign ratings is likely to break in the next one to two years, Standard & Poor's Ratings Services said on October 2 in a published report.
The report, titled Gravity Tugs At Asia-Pacific Sovereign Ratings As Global Risks Persist and Domestic Challenges Grow said the unexpected delay in the rebound of the large major economies and the spectre of US quantitative easing being wound down are contributing factors for the expected rating trend. However, in Standard & Poor's view, the most important reason may be that policy responses by some sovereigns in the region could be insufficient to maintain their credit fundamentals in this environment. Moreover, in some cases, increases in leverage over the recent years limit the governments' policy options.
"We don't see a high likelihood of a sovereign rating upgrade in the next two years," said Standard & Poor's credit analyst Kim Eng Tan. The region gained another investment-grade sovereign rating in May this year when the Philippine long-term foreign currency rating was raised to 'BBB-'. In the wake of this upgrade, however, there are now three sovereign ratings in Asia-Pacific with negative outlook (India, Japan, and Mongolia) and none with positive outlook.
Weaker growth prospects this year and expectations of quantitative easing being wound down in the US had increased the pressure on the external payment situation for some Asia-Pacific sovereigns. Although these sovereigns have seen a respite more recently, it is uncertain how long it would last for affected countries such as India and Indonesia.
"Without addressing the causes behind the capital outflows, the capital accounts of these countries could weaken further," Mr. Tan added.
The region faces some downside risks in the next six to 18 months. A renewed global slowdown or a sharper-than-expected China deceleration would be a drag for Asia-Pacific. In addition, heightened levels of domestic credit in major economies – including China, Korea, and Australia – hamper the governments' ability to respond to external shocks.