Feb 01 - Emerging Asia’s economies continue to outperform global peers, but positive rating momentum has ebbed amid a slowdown both in sovereign balance sheet improvement and structural reforms in key countries, Fitch Ratings said.
Fitch’s Sovereign Credit Briefing concluded in Singapore today after a successful stop in Hong Kong. Senior analysts and leading investors discussed challenges shaping global growth and Asia-Pacific economies.
Fitch said weaknesses in the major advanced economies, particularly the eurozone, exert a drag on global growth and sovereign credit quality. Seven of the world’s 10 largest economies are on Negative Outlook, including three major ‘AAA’-rated sovereigns - U.S., UK and France.
The European Central Bank’s announcement of its Outright Monetary Transactions initiative in September has eased tail risks in the eurozone. This supports Fitch’s view that a break-up of the eurozone will be avoided, though resolution of the crisis will be protracted.
Meanwhile, despite the recent suspension by Congress of the U.S. debt ceiling, continuing disagreement over tax and spending decisions has the capacity to prevent the adoption of a credible medium-term fiscal consolidation plan. This could have negative implications for the U.S. recovery and its ‘AAA’ rating.
In emerging Asia, prospects for a downgrade of India’s ‘BBB-'/Negative ratings will hinge on whether the authorities can stick with their reformist agenda and consolidate public finances.
In Japan, the newly elected Abe government’s stimulus plans are not in themselves a negative rating trigger for the highly indebted Japanese sovereign at ‘A+'/Negative. Its ability to achieve medium-term fiscal consolidation is a key rating driver.
China faces the twin challenges of rebalancing its economy towards consumption and away from investment - a process that could prove bumpy - and managing the consequences of the extraordinary run-up in leverage in its economy since 2008.
Fitch expects Chinese local government’s funding gap to widen, due to an economic slowdown, declining land sales and more spending on social welfare mandates and infrastructure. The credit quality of Chinese local governments varies widely. The systemic risk of these governments’ financing platforms is still controllable but reform may be needed in the medium term to mitigate risks.
An audience poll conducted at the conferences showed how investors, bankers and issuers in Asia view global issues. Two-thirds (66%) of the respondents do not envisage a bubble developing in emerging Asian sovereign credit. Over 40% of those polled think the greatest risk to the global economy is an escalation of the eurozone crisis. The majority of participants (73%) think the RMB will not become an international reserve currency within the next five years. According to over 40% of the respondents, Germany (instead of the U.S., UK or China) will be the highest-rated sovereign in five years.