Fitch APAC Risk Radar | Outlook Data
(The Insider Stories) - Fitch Ratings considers most potential risks to be lower in urgency in Asia-Pacific (APAC) than in other regions. Comparatively strong growth (we project emerging Asia to have the strongest GDP growth of any global region until 2014) and the strengthening of sovereign balance sheets have increased buffers against future shocks. The high proportion of Stable Outlooks in the APAC portfolio (see the chart “APAC Rating Outlook & Watch Distribution” below) supports our expectation of rating stability in the region.
The principal macro risk monitored continues to be potential asset-quality deterioration, particularly as Asia experienced the secondhighest rate of real credit growth by region in 2012, after Latin America. Five of the 10 countries with Fitch’s highest Macro-Prudential Indicator score of 3, which indicates a potential source of bank systemic stress buildup, are located in APAC. Many policymakers in the region have employed tight fiscal and loose monetary policies in response to weaker external environments. With moderating growth and the buildup of risks, bank balancesheet deterioration could weigh on capital.
Sustainability of economic growth is likely to be a key contributor to rating stability. Fitch views domestic demand and intra-regional trade as important buffers against a weak global environment, particularly for exportled countries. Ultimately, demand from highincome countries remains crucial. Buffers built up by economies in the region play an important role in creating policy flexibility for offsetting external shocks, and maintaining growth while keeping inflation in check.
- Downside risk from eurozone contagion, together with risks arising from the withdrawal of foreign funding, have receded with the expectation that loose monetary conditions will persist for major economies.
- Fitch considers geopolitical risk a tail risk, and therefore has placed it as low urgency. If it materialised, it would have the strongest negative ratings impact on the APAC portfolio, as it would affect intra-regional trade.
- Domestic demand has helped exportorientated countries weather reduced overseas demand, but domestic inflation could reduce the flexibility available to policy-makers.
- If Japan’s new reflationary strategy is successful, it would be marginally positive for consumption. Fitch does not expect the results of this strategy to be immediate.
- The economy in China shows little sign of succumbing to a hard landing, as recent data point to some support for domestic demand coupled with a rebound in exports. However, if growth in China does slow materially (not Fitch’s base case), we forecast that this would have the widest ratings impact, because of the regional and global implications of a China hard landing.
- The recent strength in the high-yield bond market is potentially a double-edged sword, as increased short-term financing flexibility can turn into heightened refinancing risks in the medium term.
- Banks in developed APAC countries have shown some appetite for cross-border expansion into higher growth markets such as Indonesia and Thailand. The increased challenges in operating and regulatory conditions have the potential to compromise balance-sheet strengths.
- Property markets in several APAC countries have been buoyed by loose monetary conditions, with areas having above-trend price growth far outstripping economic growth. A material reversal in real estate pricing in any country can have negative economic implications, however several factors make it a less urgent concern. In China, homebuilders’ ratings already factored in the impact of government measures. Structured finance is rarely used as a source of funding for residential housing in markets such as Hong Kong or Singapore. Fitch stress tests conducted for Australia also showed rating resilience to significant downward pricing movements.
