Positive sovereign ratings of emerging Asian nations falter

The positive rating momentum in emerging Asia has stalled amid slower improvement in sovereign balance sheets and, for some countries, concerns over high and rising leverage in the private sector.

In a recently published special report, Sovereign Review and Outlook: June 2012, Fitch Ratings says the region's two giants, China and India are on Negative Outlook (for China, the Local Currency 'AA-' rating only).

Korea's Foreign Currency rating of 'A+' is on Positive Outlook, alone in the region. The narrow balance of Negative Outlooks testifies to the stalling of upward rating momentum in the region, although this should be seen in the context of a run of positive actions in 2010-2011. The remaining eight emerging Asia sovereigns rated by Fitch are on Stable Outlook.

Fitch has cut its 2012 growth forecast for emerging Asia to 6.3 per ent from 6.9 per cent in 2011. Despite the lower forecast, emerging Asia is projected to remain the world's fastest-growing region. Part of the weakening reflects global pressures including a deteriorating outlook for the eurozone.

Emerging Asia's exports weakened in Q112 at a pace not seen since 2009, although the most recent data show some pick-up. However, there are also home-grown sources of weakness. All three of the region's biggest economies - China, India and Korea - are showing the lagged effects of counter-inflationary policy tightening in 2010-2011.

Emerging Asia is importing loose monetary conditions from the high-income economies, in particular the US, via more-or-less fixed exchange rates in many countries. Low real interest rates have spurred credit growth.