Asia Sovereign Ratings Resilient to US Negative Watch

The recent assignment of Rating Watch Negative on the US's AAA sovereign ratings is unlikely to lead directly to downgrades of any Asian sovereigns, even though these are among the largest holders of US Treasuries, says Fitch Ratings. US Treasuries are likely to remain among the most liquid financial instruments, and so would continue to underpin Asian external liquidity and sovereign credit profiles.


Asian sovereign credit profiles have generally benefited from a strengthening of their foreign-currency balance sheets since the Asian Financial Crisis in 1997-1998. This has been driven by a rapid pace of reserve accumulation by most countries in the region, up until 2011.


The growth in foreign-currency reserves has subsequently slowed. Moreover, this has recently dropped from a year ago in countries such as India, Indonesia, Mongolia and Sri Lanka, due to twin deficit pressures and lower net capital inflows.


Nonetheless, regional reserves remain an important buffer against external shocks, and therefore underpin overall sovereign creditworthiness. This factor is not eroded by the Rating Watch Negative on the US's AAA sovereign rating.


At end-July 2013, Asian governments owned around 26% of the total marketable Treasury debt. The largest holders were China and Japan, with 11% and 10%, respectively. Nine other Asian sovereigns held 5%.


The latest data show that China and Japan have among the world's largest reserves - US$3.6 trillion and US$1.2 trillion, respectively. The foreign-reserve positions of countries such as Korea, Taiwan, Hong Kong, Singapore and India remain among the largest in the world - in excess of US$200 billion. At end-September, IMF data showed that 62% of global reserves for which a currency breakdown is provided is held in US dollars.


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