The sovereign rating outlook for Asia-Pacific is negative this year, says Moody’s Investor Service, with slowing growth likely to further amplify fiscal vulnerabilities, liquidity risks and demographic challenges.
In a new report detailing its outlook for Asia-Pacific sovereign creditworthiness in 2020, Moody’s marked the region as negative, citing slower economic growth amid turbulent external factors and reduced capacity to respond to shocks.
The slow growth can be partly blamed on US-China trade tensions, despite a “phase one” trade deal.
“Despite the phase-one deal, the prospect of the US and China agreeing on long-term issues like industrial policy, intellectual property and market access remains highly uncertain,” said Martin Petch, a Moody’s vice-president and senior credit officer. “As a result, the US-China trade relationship will remain a source of uncertainty and volatility in 2020.”
According to the report, these trade frictions will spread via global supply chains, and Asia-Pacific sovereigns embedded in global supply chains — Hong Kong, South Korea, Malaysia, Singapore and Thailand, along with Vietnam to a degree — will be impacted as a result.
Weakening trade is also curbing investment and, if continued, will further reduce potential growth and amplify long-standing structural challenges like fiscal vulnerabilities and demographic change.
“In Asia-Pacific, trade tensions are no longer simply exacerbating the global slowdown in trade volumes,” Mr Petch said. “The shock is now also extending to investment, with businesses putting off their expansion plans amid economic, political and policy uncertainties, which will hurt income growth, competitiveness and productivity in the long run.”
On average across Asia-Pacific, Moody’s forecasts GDP growth of 4% for 2019-21, slower than the 4.4% over 2014-18 but still strong for global standards.
The erosion of fiscal positions as governments try to buffer against external and domestic growth shocks will be a risk for some sovereigns. For India, China, Pakistan and Sri Lanka, slower growth prospects will increase restrictions on fiscal space, limiting the capacity of the authorities to support their economies. A few, including Hong Kong, South Korea and Singapore, have much more fiscal flexibility.
In addition, weaker growth will compound structural challenges in the region, ranging from ageing populations to creating enough jobs for large and young populations in places like the Philippines, Indonesia and Malaysia.
Amid heightened unpredictability, Asia-Pacific’s frontier markets are vulnerable to any sudden shift in investing trends.