Asia Pacific sovereigns mostly stable in the face of rising growth risk

The balance of risks for APAC sovereign credit profiles has shifted towards weaker global growth and away from global financial conditions, Fitch Ratings says. Their views are as follows:

Nineteen of our 20 sovereign ratings in the region are on Stable or Positive Outlooks, reflecting the cushion provided by strong fiscal and external buffers and shock-absorbers from flexible policy frameworks. The only Negative Outlook in the region is on Hong Kong's 'AA' rating following our recent rating action, which highlights the relevance of geopolitical risk for some APAC sovereigns.”

Disruptions from the sharp escalation in the US-China trade dispute are darkening the global economic outlook, causing us to revise our global economic outlook (GEO) forecasts as described in our published update. As well as downward revisions to our Eurozone and US GDP forecasts, we now expect Chinese growth to slow to 6.1% in 2019 and 5.7% in 2020, down from 6.2% and 6.0% in the June 2019 GEO.

Policy responses are under way. Low inflation and the Federal Reserve's shift to a more accommodative monetary stance have seen numerous central banks in the region cut interest rates. India's Reserve Bank of India (RBI) was the first to do so in February, and it has cut interest rates four times, by a cumulative 110bp. Countries with near-term fiscal space, such as Korea, have announced expansionary budgets.

The direction of sovereign ratings will partly reflect the ability to enact growth-supporting policies while avoiding significant deterioration in fiscal or external positions or increases in macro-economic stability. For example, we believe the Chinese authorities will stop short of the type of credit-led stimulus policies that could exacerbate medium-term financial and economic imbalances, but this remains a downside risk to the rating in 2019-2020. India's 2019-2020 budget, announced in July, avoided fiscal loosening, but did not signal fiscal consolidation in the coming years. Sovereign-specific factors can affect the capacity to respond to weaker growth and our corresponding credit outlook. For example, our revision of the Outlook on Thailand to Positive in July reflects our view that lingering political risks are unlikely to derail sound macroeconomic management. An improving record of economic management was also a factor in our revision of the Outlook on Vietnam to Positive in May.

In contrast, persistent unrest in Hong Kong, which we downgraded to 'AA'/Negative this month, has damaged international perceptions of governance and called into question the stability and dynamism of its business environment. Other geopolitical hotspots we are monitoring include frictions between Korea and Japan, tensions in cross-strait ties between mainland China and Taiwan, and territorial disputes between India and Pakistan.

Volatility in capital flows as markets adjust their global interest-rate expectations remains a risk. This could maintain pressure on APAC's frontier markets, although to varying degrees their credit profiles have stabilised with the IMF program in Pakistan, easing of security concerns in Sri Lanka, and strong fiscal performance in Mongolia.