Moody's: Asian Credit Stable in 2014, Despite Stronger Headwinds

Moody's Investors Service says the overall credit quality of sovereigns, corporations and financial institutions in Asia Pacific will be stable over the next 12 months.


"The Asian region can withstand increased headwinds that are likely in 2014, including slower economic growth in China, the US Federal Reserve scaling back on its bond-buying program and the potential bursting of asset bubbles," says Michael Taylor, Moody's Managing Director and Chief Credit Officer for Asia Pacific.


"We do not expect balance-of-payments crises when the US Federal Reserve scales back its bond-buying program, even in countries which have recently been under greatest exchange rate pressure," says Taylor.


Taylor explains that sovereigns have built up large reserve buffers and used flexible exchange rates to absorb shocks, and most banking systems are funded with deposits and have little offshore wholesale funding exposure, with the exceptions of Korea, Australia and New Zealand.


On possible asset bubbles, Taylor says the banking sector has significant buffers against falling real estate prices, owing to generally low loan-to-value ratios and strong regulatory oversight.


"In addition, refinancing risk is manageable for the Asia Pacific corporates that we rate, as most of the maturities are for investment-grade companies that are blue chips in their home or regional markets and will continue to have access to domestic banking systems and local bond markets," says Taylor.


"However, in Japan, while evidence is growing that efforts to revitalize the economy through Abenomics are gaining traction, the gains so far have been temporary. Sustained growth can only be achieved through supply-side measures, labor market reforms and deregulation," adds Taylor.


According to Moody's report, the slow pace of recovery in the advanced economies is constraining demand for the region's exports, as the advanced economies remain the most significant sources of external demand for Asia.


The report points out that while China has grown in importance as a source of regional demand, the US and EU are still much more significant destinations for the region's exports. In addition, Moody's report says growth in China should be slower in future than in the past three decades.


Moody's report also says that slower growth in China will have adverse effects on the economic growth and government finances of countries that export natural resources, and there have already been some signs of an impact in Australia and Indonesia. Manufacturers' exports from Japan, Korea and most ASEAN economies have also suffered from a drop in demand from China.


In addition, Moody's report says the recent communique from the third plenum of the 18th Congress of the Communist Party of China (CPC) -- which sets specific benchmarks for key social, environmental and economic reforms -- is important in addressing China's main challenges, such as the need for greater economic and financial reforms to sustain growth.


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