Standard & Poor's has revised down its growth expectations for Asia-Pacific economies in 2008 and 2009. It says key conclusions from a quarterly assessment of the region indicate that the main threat to growth has shifted from the slowdown in the US to inflationary pressures and the efforts by the region's governments and central banks to tackle them.
While the outlook has become somewhat more pessimistic, growth momentum will keep the region growing at respectable rates, the rating agency noted.
Dr Subir Gokarn, chief economist, Standard & Poor's Asia-Pacific, said, "With countries allowing domestic fuel prices to increase even partially, there is little question that, as long as oil prices remain at current levels, or even decline moderately, the price adjustments will keep up the pressure on inflation rates across the region. This puts the spotlight on monetary policy."
In a recent quarterly report called "Asia Gauge", Dr. Gokarn further explained that the surge in oil and commodity prices has curtailed central banks' ability to begin easing up on liquidity.
A stable first-quarter performance buoyed by robust domestic demand in countries such as China and India has shifted the region's monetary-policy priority toward curbing inflation, at the cost of growth. Despite growth slowing down in the second quarter, inflation-controlling measures continue.
"With the exception of New Zealand, every country we cover has begun raising policy rates and is expected to continue to do so for the rest of 2008," said Dr. Gokarn.
"As monetary-tightening measures begin to take effect, inflation rates are expected to come down in 2009, with a hardening of interest rates into 2009. As a result of higher prices throughout the region, oil consumption is expected to start declining, thus contributing to a moderation of global oil prices. While oil prices may not rise in 2009, they are expected to remain relatively high, putting pressure on the current accounts of most of the countries in the region."
Although Asia will continue to benefit from higher economic growth rates vis-à-vis its global counterparts, regional credit markets face headwinds from domestic and external factors, including inflationary concerns, unfavorable interest rate dynamics, financial exposure, and a rising import bill. A recent Standard & Poor's article titled, "Asia Credit Comment: Can It Stay Above The Fray?" details the evidence from Standard & Poor's ratings-based indicators, suggesting that the negative tone in regional corporate credit quality is slightly more elevated than in previous quarters, even though it is still below the levels observed in the U.S. or Europe.
Devi Aurora, senior director, global fixed income research, added, "While pressures are more visible in light of global frailties, macroeconomic stability is not under threat. Exports continue to be resilient, in part benefiting from reduced dependence on the U.S. compared with a decade ago. In addition, regional domestic demand is accelerating (notably in large markets such as China and India), and the region's net creditor profile and cumulative foreign reserve position are peerless."
In sum, Standard & Poor's believes that even after taking the changed global circumstances into account, the robustness of the growth momentum will keep the Asian region growing, albeit at slower rates amid macroeconomic stability.