Mixed outlook for Asia-Pacific sovereigns, external risks, despite stronger balance sheets: S&P

Although it is a mixed picture for Asia-Pacific sovereigns for the next 12-18 months, much of the region faces global and domestic risks from a relatively strong position,
Standard & Poor's Ratings Services says in a report, Asia-Pacific Sovereigns: Mixed Outlook In An Uncertain Year, published today.

"We expect neither sovereign upgrades nor downgrades to dominate the trend in this region," said Standard & Poor's credit analyst Kim Eng Tan. "Still, the global growth outlook, external funding pressures, domestic political issues, and unexpected changes in policy or economic environments can put pressure on ratings."

Asia-Pacific economies would inevitably feel the impact if another major economic or financial shock materialises. The experience of 2008-2009 showed that deepening regional trade does not offer a strong shield against a sharp recession in the developed economies.

"Economic performance in much of Asia-Pacific held up reasonably well mainly due to the massive Chinese economic stimulus," Tan said. The region could still benefit from another Chinese stimulus if a new shock hits. However, it may not come quite as strongly or quickly as some may hope due to domestic political reasons in the country, he noted.

If another global recession occurs, we expect it to have the strongest downward pressure on sovereign creditworthiness in Japan and Vietnam, where the outlooks on the long-term ratings are already negative. For Japan, a new economic slowdown would accelerate the increase in debt beyond the already significant expansion that we project in the next three years. It would also make an increase in the consumption tax rate more unlikely.

In Vietnam, although government measures implemented since 2011 have helped to stabilise the economy over the past year, confidence remains weak. Another economic slowdown or a significant easing of macroeconomic policy could trigger a new wave of resident capital outflows and higher inflation.
 
"Besides Japan and Vietnam, economies that are major exporters, borrowers of commercial international funds, and those that have seen high credit growth face risks from external shocks," Tan said.

Still, many of the key sovereigns in the region maintain strong external balance sheets and modest government debt levels. Their banking sectors also show few signs of stress at this time.

Consequently, S&P expects most of them to weather its base-case scenario - a mild recession in Europe, no major international financial disruptions, and a soft landing in China - with little damage to their credit standing.