Fitch Ratings: APAC Sovereign Outlook Stable As Balance Of Risks Shifts

Fitch Ratings - Sakshi Post

Hong Kong/London: Rating Outlooks for APAC sovereigns remain Stable in 2Q19, supported by strong financial buffers and flexible, proactive policy frameworks, Fitch Ratings says.

The balance of key risks has shifted since the start of 2019, with global financial conditions easing, while global growth prospects have deteriorated.

Ratings are evenly dispersed between 'AAA' to 'B' among the 20 APAC sovereigns rated by Fitch. This reflects the diversity of the region's credits, which span advanced economies, emerging-market economies and frontier markets.

All our ratings are unchanged so far in 2019, following downgrades in late 2018 to two of the region's frontier markets, Pakistan and Sri Lanka. We have affirmed the ratings of seven APAC sovereigns this year.

All the region's sovereign credits are on Stable Outlook. Strong fiscal and external buffers, and shock absorbers embedded in policy frameworks, continue to enable the region's economies to withstand external pressures. External liquidity pressures have been less severe than we envisaged heading in to 2019.

In our March Global Economic Outlook (GEO), we still forecast the US Federal Reserve to raise rates once, late this year, but this is down from the three Fed hikes that we predicted in our December GEO. This, alongside the Fed signalling that it will hold a larger balance sheet through the medium term and a more dovish ECB, amounts to a much more generous outlook for global liquidity through 2019.

Nevertheless, heightened external financing risks are a factor in the low ratings of Pakistan (B-) and Sri Lanka (B), both of which were downgraded in December 2018 and are seeking to stabilise their external finances with IMF assistance. Sri Lanka secured a staff-level agreement on the fifth review and extension of its IMF programme in March.

The tragic church and hotel bombings that occurred over the Easter weekend will undermine tourism receipts, which had been rising steadily in recent years to about 5% of GDP in 2018.

Downside risks for the region are mainly present through slower global growth. We reduced our global growth forecast for 2019 to 2.8% from 3.1% in our March GEO.

Economic activity weakened across APAC in late 2018 and early 2019 on sharply lower exports from deteriorating global trade flows. As long as trade tensions persist, these can weigh on sentiment and regional flows.

China (A+) saw a significant loss of growth momentum in 2H18, but there are increasing signs that the step-up in policy support is gaining traction.

Monthly indicators such as credit growth and investment have picked up, contributing to a better-than-expected 1Q19 GDP growth outturn of 6.4% yoy, and underpinning our view that growth will stabilise this year within the government's 6.0%-6.5% target range.

We believe the authorities will stop short of stimulus that could significantly exacerbate medium-term financial risks and economic imbalances, but this remains a downside risk to the rating.

A more dovish Fed has created room for modest monetary policy easing in some countries.

The Reserve Bank of India (RBI) became the first central bank in APAC to begin an explicit easing cycle this year, and has already cut policy rates twice, amounting to a cumulative 50 bp. We see growth in India (BBB-) holding up reasonably well, at 6.8% in FY20.

Idiosyncratic risks are also important in our sovereign credit assessments. For example, housing market weakness in Australia (AAA) will weigh on construction and consumption activity, and we forecast GDP growth of just 2.0% this year, the slowest expansion since 2009.

The lack of agreement during March's Hanoi summit between Donald Trump and Kim Jong Un confirms that diplomacy on the Korean peninsula will be protracted and the outcome highly uncertain.

Early indications following Indonesia's elections this month are that the outcome will entail broad continuity in economic and fiscal policies, with a focus on macro stability, infrastructure development, and efforts to increase the government's low tax ratio.

But details of likely reforms under a second Jokowi administration will take time to emerge. India and Australia are among those APAC sovereigns with elections approaching.

For more detail on our key credit views and forecasts on all 20 Fitch-rated APAC sovereigns, see APAC Sovereign Credit Overview 2Q19, published today and available at, or by clicking on the link above.

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