JAKARTA (TheInsiderStories) — Moody’s Investors Service says that its outlook for sovereign creditworthiness in Asia Pacific (APAC) in 2019 is stable overall, reflecting its expectations for the fundamental credit conditions that will drive sovereign credit over the next 12-18 months.
Solid domestic fundamentals, including rising incomes and competitiveness, generally ample foreign exchange reserves and often sizeable domestic savings, will continue to underpin government credit quality.
However, growth is slowing and further downside risks have intensified. Risks stem from tensions between the US (Aaa stable) and China (A1 stable), tightening global financing conditions, and shifting political and policy priorities domestically. A weaker economic outlook means that the window for addressing credit challenges is closing.
In the report, Moody’s baseline projections take into account all
implemented and planned trade and investment barriers between the United States (US) and China. Over 2019, Moody’s expects that relations between these two countries will swing between conflict and compromise, involving trade, investment, technology and geopolitics.
Moody’s expects the pace of economic expansion in APAC to soften in 2019-2020, but remain robust. Asia’s emerging and frontier market economies are likely to experience the sharpest deceleration in 2019, with likely median GDP growth rates of 5.5% and 5.2% respectively, weaker than Moody’s estimates for 2018. Meanwhile, growth in the advanced economies will likely slow to 2.5%.
Growth will be underpinned by rising incomes and competitiveness,
supported in turn by infrastructure investment. And ample foreign
exchange reserves and domestic savings provide substantial buffers
against external shocks.
However, tensions between the US and China could disincentivize
investment and weigh on growth potential beyond Moody’s current
assumptions, given trade exposure to China and the integration of
manufacturing supply chains within APAC.
Wider risk premia than currently anticipated would also weaken debt
affordability and raise government liquidity risk, particularly for
Furthermore, shifts in domestic priorities away from fiscal consolidation, or in political appetite to address weaknesses in the financial sector, pose a risk to some emerging and frontier market sovereigns’ credit profiles.
In some advanced economies, an increasing focus on social welfare and more inclusive growth, while conducive to social cohesion and policy effectiveness in the longer term, could hurt near-term profitability and investment.
As of Jan. 9, 2019, 21 of Moody’s 24 rated APAC sovereigns had stable rating outlooks, while three had negative outlooks. Positive and negative rating actions were broadly balanced in 2018.
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