Fitch: EM Asia Policy Management is Key, Despite Tapering Delay

Policies to keep growth on a sustainable footing without a worsening of trade deficits and raising of inflationary pressure remain key to sovereign creditworthiness in emerging Asia, says Fitch Ratings. This is despite the US Federal Reserve's decision to delay the "tapering" of its quantitative easing.


Fitch notes that success in lowering external imbalances to within financeable limits should help anchor investor confidence and head off any future resumption or intensification of market pressures.


The dovish statement from the Fed has boosted emerging market asset prices, according to Fitch. The MSCI Asia-Pacific index rose nearly 2% on 19 September. Meanwhile, the JP Morgan EMBI index stripped spread compressed by 18bp, and currencies that have been weakest year-to-date in the region - the Indian rupee and Indonesian rupiah - rallied by 2.5% and 4%, respectively.


At most, from a credit perspective, these market movements imply that emerging Asian countries with current account deficits are likely to face a temporary easing in funding conditions.


Ebbing market pressure provides a relatively favourable short-term backdrop in which to cut external funding gaps, which have recently proven more difficult to plug with capital inflows.


However, Fitch still expects global funding conditions to tighten over the coming year, even if the pace and scale remain subject to uncertainty. Therefore measures to keep growth on a sustainable footing without a structural deterioration in trade deficits or sustained pick-up in inflation pressure, remain important for shoring up investor confidence and for sovereign creditworthiness.


One risk is that allowing economic policy to drift, with economies kept afloat for a while longer by easy access to cheaper-than-expected money, would merely risk setting the stage for more volatility and a potentially bigger adjustment down the road. Such a build-up of perceived risks could ultimately prove negative for some regional sovereign ratings.


The region faces headwinds not only from eventual Fed tapering driving tighter funding conditions, but also from pressure on commodity prices partly as a result of China's slowdown - this has been particularly significant for Indonesia.


Fitch expects the region's growth to slow to 5.7% in 2013 from 5.9% in 2012, the weakest since 2001. However, this remains strong relative to projected global EM growth of 4% for 2013.


Some tolerance for currency- and financial-market volatility is built into regional ratings. However, any future intensification of market concern and resumption of downward pressure on currencies could risk undermining financial and economic stability, eg via vulnerabilities on corporate or bank balance sheets - although this is not Fitch's base case.


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