Global Credit Research
In India (Baa3 stable) and Indonesia (Baa3 stable), investors are watching to see whether new governments will take policy steps to further address the vulnerabilities that drove negative market sentiment as the US Federal Reserve moved toward a monetary stimulus exit last year. In each of these countries, the narrowing in their respective current accounts and the consequent stabilization of the overall balance of payments may not be sustainable in the absence of tough fiscal reform.
In Thailand (Baa1 stable), too, political developments will be key. While the recent coup d'état has provided some relative stability, growth now is significantly weaker than it was in 2006 when the military last took administrative matters into its own hands.
Of 22 sovereigns in the Asia-Pacific region, most have stable outlooks, indicating our broad expectation of steady credit conditions over the next 12 to 18 months. Malaysia (A3) and the Philippines (Baa3) are on positive outlook, while Mongolia (B2) is on negative outlook.
A focal point for investors has been the extent to which activity in China (Aa3 stable) will cool as authorities wean the region's largest economy off its dependence on public-backed and credit-fuelled investment for growth.
Moody's takes the view that policymakers will be able to achieve a soft landing, with GDP expanding between 6.5% and 7.5% this year and next. But in the case of a steeper downturn in demand, large commodity exporters such as Australia and Indonesia would be most exposed. In contrast, among ASEAN countries, the Philippines could be the best insulated against a further slowing in Chinese growth given its reliance on domestic demand, services exports, and overseas workers' remittances.
Meanwhile, signs that Japan's (Aa3 stable) economy is on the road back to healthier rates of growth also bode well for the region as a whole. The government's update to its growth strategy last month indicates the degree of seriousness with which it is taking the challenge of revitalizing activity. But further implementation of structural reforms will be crucial if the administration is to sustain the momentum provided by monetary and fiscal stimulus measures and achieve its budgetary consolidation goals in 2015 and 2020.
In a number of countries in Asia Pacific, interest rates have started to rise from extraordinarily low levels. At the same time, trends in global liquidity conditions will be the key driver of capital flows, especially as the US Federal Reserve navigates its exit strategy.
Consequently, tighter funding conditions may have differing impacts on sovereign creditworthiness depending on countries' respective reliance on external financing.
Over the past year, long-smoldering tensions have rekindled over conflicting claims in the South China Sea between China and countries in the region, in particular Vietnam (B2 stable) and the Philippines. Tensions also persist in the East China Sea between China and Japan.
Nevertheless, we do not expect that geopolitics will materially affect sovereign credit profiles in the region over the coming year and even further ahead.
The recent disintegration of Baghdad's sovereignty over Iraq threatens to destabilize global oil prices, a development which would also pose growth challenges for net energy importing countries -- notably Indonesia, which already has a current-account deficit.
