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Fitch Ratings yesterday cut emerging Asia’s 2012 growth to 6.8% from 7.4% previous estimated in June, citing a multitude of global and regional issues
.Fitch said the downgrade reflects both the deterioration in the outlook for the world economy and the lagged impact of policy tightening in some countries, including the region’s two giants, China and India.
“Emerging Asia’s resilience provides some support for high-income Asian countries relative to other advanced economies, although weak domestic demand and a strong currency make for anaemic growth prospects in Japan,” Fitch said in its special report on the Asia Pacific Sovereign Outlook.
The rating agency also said many emerging Asian economies’ prospects are bolstered by scope for a domestic policy response to any deterioration in global economic outlook. China and India are exceptions.
“Although China’s explicit public indebtedness is low and fiscal stimulus may be feasible if needed, the country’s banking system is still working through the consequences of the credit-led stimulus of 2009-2010 and may struggle to repeat the effort. India is constrained by negative real interest rates and the high public deficit and debt burden,” Fitch added.
The reduction partly reflects weakening in the outlook for the advanced economies since June. It is also partly driven by the impact of policy tightening in a number of Asian countries in response to stubbornly high inflation, including China (58% of the region’s GDP in 2011) and India (a further 15%).
Despite the slowdown, the projection for regional annual average inflation of 5.9% for 2011 exceeds the 5.6% expected in June, while the 2012 inflation forecast is 4.9%, up from 4.7% in June.
Fitch expects the emerging Asia region as a whole to have a current account surplus of 1.7% for 2012, down from 2.2% for 2011 and 3.5% in 2010. This indicates that foreign demand remains an important if diminishing source of growth in the region. Emerging Asia excluding China (EAEC) sent 20% of its exports to the eurozone in the year to July 2011, against 21% to the US. China sent 14.5% of its exports to the eurozone and 17.3% to the US.
Real interest rates have risen for the region in aggregate, including for China and India, although overall the region’s authorities have not allowed exchange rates to strengthen markedly. Nevertheless, the pace of reserves accumulation slowed in Q311, testifying to decreased risk appetite among investors.
Both China and India face a combination of slowing activity and stubbornly high inflation, underlining the risks that can arise from allowing inflation to rise above desired ranges. Fitch has revised down its forecast for China’s growth to 8.2% for 2012, from 8.5% in June. The official PMI sank to 49 in November, below the break-even 50 level and the weakest result since February 2009, indicating weakening activity.
Fitch has revised its forecast for India’s growth in the financial year to March 2013 to 7.5%, from 8.2%, as inflation and monetary tightening are weighing on investment. The Reserve Bank of India raised its key policy rate by 2.25% over 2011 to 8.5%, although this still left the rate negative in real terms against headline wholesale price inflation of 9.1% in November.
Moreover, the Indian rupee weakened to an all-time low against the US dollar of around 52 in November 2011. If sustained this level could give a further upward kick to inflation in 2012 and complicate policy management still further.
Fitch sharply revised down its forecast for Thailand to 2.8% in 2011 from 4% in the June Sovereign Review and Outlook due to the impact of heavy flooding in October. Manufacturing output fell 36% y-o-y in that month, the worst drop on record.
Prospects remain uncertain as recovery from the disruption continues, although further downside risks to growth in 2011 arising from flooding disruption would be likely to be offset by a rebound in 2012 as the situation is restored.