Stable outlook for Asia Pacific sovereigns in 2019, says Moody’s

• Solid domestic fundamentals balances against rising risks

Moody’s Investors Service has said 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.

Moody’s conclusions are contained in its just-released report, ‘Sovereigns – Asia Pacific: 2019 outlook stable as domestic strengths counter rising external, policy uncertainties’.

In the report, Moody’s baseline projections take into account all implemented and planned trade and investment barriers between the 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 2019-20, 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 disincentivise 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 frontier markets.

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 9 January, 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.