Moody's: APEC Sovereigns Face New Challenges

Moody's Investors Service says that Asia-Pacific Economic Cooperation (APEC) sovereigns are facing several new challenges that have emerged in the wake of the global financial crisis, but at the same time creditworthiness generally continues to show resilience and stability.


In the "Sovereign Ratings in APEC and Global Economic Challenges" report, Moody's notes that the slow pace of recovery in the advanced economies -- with a subdued outlook for those in Europe and a modest recovery for that in the US -- is constraining demand for the region's exports, a key source of corporate profitability and economy-wide employment as well as income growth.


Furthermore, the resurgence of volatility in the global capital markets -- in anticipation of the eventual unwinding of extraordinary monetary stimulus by the US Federal Reserve -- is clouding the near-term outlook.


However, Moody's does not expect balance-of-payments crises, not even in those countries whose exchange rates have faced the most pressures since May 2013.


Large holdings of official foreign exchange reserves across the board in emerging market APEC and flexible exchange rate policies provide formidable buffers to capital outflows.


The softening of growth in China -- APEC's second largest economy and a major driver of regional growth -- introduces considerable uncertainty to the long-term outlook, given the increasing influence of China on economic cycles due to expanding trade ties throughout the region.


The effects of declines in some commodity prices have included slower growth and deterioration in the balance of payments in many of the region's countries.


On the other hand, Moody's observes that since the global financial crisis erupted in September 2008, the performance of APEC sovereign ratings has in general been of stability and strength, in part due to the economic benefits derived from APEC's promotion of free and open trade and investment over the past two and a half decades of the forum's existence.


Of the 20 rated member sovereigns in APEC, 11 showed unchanged ratings between September 2008 and September 2013, while seven were upgraded, and only two were downgraded during this period of global financial crisis and economic recession.


The numbers reflect the relatively stronger performance of the APEC sovereigns in East Asia and Latin America. Underscoring the region's stability, the ratings of 18 of the 20 member sovereigns that Moody's rates currently have stable outlooks, while Peru's Baa2 carries a positive outlook and the Philippines' Ba1 is under review for upgrade.


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