Moody's says Asia-Pacific sovereign ratings demonstrating resiliency

Moody's Investors Service says in its just-published "Asia-Pacific Regional Outlook - January 2010" that regional sovereign ratings will likely remain resilient to economic risks coming to the foreground as the global economy recovers from the crisis that emanated from the US and Europe.


Regional rating trends were generally positive in 2009 with no downgrades originating exclusively from the global crisis. Indeed, Indonesia and the Philippines were upgraded to Ba2 and Ba3, respectively, last year, while A1 China, Aa2 Hong Kong, and India (its Ba2 local currency government rating only) have positive outlooks.

The three countries with negative outlooks -- Baa1 Thailand, Ba3 Vietnam and B1 Fiji -- have long-standing underlying imbalances or political tensions which precede the onset of the global crisis.

Growth potential in the Asia-Pacific remains robust, benefiting from fiscal and monetary stimulus programs, liquid banking systems capable of extending credit, intra-regional trade, and foreign exchange reserve defenses built up after the Asian financial crisis of late 1990s.

"Moreover, recovery from the global crisis is appearing similar to previous recovery periods, in contrast to prospects for a sluggish rebound in the US and EU," says Tom Byrne, a Senior Vice President and Regional Credit Officer in Moody's Sovereign Risk Group.

"Despite the crucial role played by fiscal stimulus programs in supporting growth in 2009, most Asia-Pacific countries (ex-Japan) have begun or will likely start to wind down expansionary policies this year," says Byrne.

"Because of relatively less encumbered public finances in the region, with the exception of Japan, the build-up in debt over the past couple of years has been relatively moderate, a key factor in supporting the generally positive trend in ratings in Asia-Pacific," says Byrne. "Also, most countries' fiscal positions can absorb a moderate rise in interest rates in the year ahead," Byrne added.

Moody's notes that China is playing a lead role as a driver of growth in the region, while Japan sits on the sideline as it struggles to overcome stubborn deflation and lackluster domestic demand.

Despite the subdued outlook for Japan, the weakest in the region, Asia-Pacific GDP growth may reach 4.9 percent in 2010, up from 1.2 percent in 2009 and slightly stronger than previous recovery periods in
1999 and 2002.

Accordingly, the growth outlook for Asia-Pacific is more robust than that of Europe or Latin America. Excluding Japan, regional GDP growth is expected to be even stronger at 6.6 percent in 2010. This economic robustness has also underpinned the relatively positive rating trend in the region.

Risks to the economic outlook for the region include a relapse in the recovery in external trade and a rise in inflation. The latter could prove challenging to regional policymakers with the return of risk appetite and strong capital inflows, and could prompt more urgent exit strategies from counter-cyclical policies.

In addition, an endogenous risk to the regional outlook is an asset bubble which careens into a boom-bust cycle in China. Moody's central scenario, however, is that regional governments and monetary authorities will maintain a grip on policy, squeezing as tight as needed to prevent an inflationary destabilization.

The January 2010 edition of the "Asia-Pacific Sovereign Outlook" is the first of a regular publication explaining Moody's views and perspectives on sovereign ratings in the region. It is one of three regional outlooks being published by Moody's Sovereign Risk Group this month, the other two covering Latin America and Europe.

Two other regular reports further detail Moody's perspectives on sovereign ratings, the quarterly "Aaa Sovereign Monitor", which focuses on the highest-rated sovereigns, and the annual "Sovereign Risk Outlook", which provides a year-end review of global sovereign ratings activity and perspectives for the coming year. The latest editions of these reports were published in December 2009.