Moody's: Sovereign Credit Fundamentals Resilient for Asia-Pacific

Moody's Investors Service says that it expects sovereign credit fundamentals in the Asia-Pacific region to remain resilient to both global headwinds during 2013 and the persistence of extraordinary easing by the US Federal Reserve.


At the same time, sovereign credit profiles in the region will likely continue to improve relative to those in most other regions.


In addition, although growth in the region is expected to remain flat at 5% in 2013, it will continue to grow faster than any other region. While China's growth has moderated, it should remain relatively robust in the near term.


Importantly, banking systems in the Asia-Pacific are generally sound and well-positioned to continue to support growth without posing significant contingent risks to their respective sovereigns. Financial soundness indicators, such as capital adequacy, liquidity (low loan-to-deposit ratios), and asset quality, are generally robust enough to withstand either a normalization of interest rates, or a range of adverse economic shocks emanating from the global economy.


Moody's further expects growth in Asia-Pacific to pick-up only slightly over the near term, and remain below long-term averages in 2013 and 2014. This expectation is especially so with the large economies in the region.


Notably, Moody's expects China's annual real GDP growth to remain at around 7.5% and thus avoid a hard landing -- although below the past decade's average of 10%.


For 2012 and 2013, Moody's expects the region's GDP-weighted average current account surplus to hover around 1% of GDP after having peaked at 5% in 2007. As a result of this projected lower current account surplus, the growth of aggregated international reserves in the region, which amounted to roughly US$ 6.5 trillion as of September 2012, will slow further.


Nevertheless, Asia-Pacific will maintain its top position in terms of total reserves, which are projected at US$ 7 trillion by end-2013.


Leadership changes in the big three East Asian economies will be positive for pro-growth policies in the near term, although Japan in particular faces long-term challenges.


Nevertheless, rising geopolitical tensions over the past year have emerged over maritime territorial disputes and would have significant economic ramifications if not constructively managed. Elections over the next year may also impact the outlook for reform in several countries, thus coloring our views on fiscal and debt sustainability.


Finally, the new report notes that a number of frontier markets in the region could be of particular interest to investors in 2013.


Given their drive to sustain high growth rates, despite relatively shallow domestic pools of savings, Asia-Pacific's frontier economies may continue seek to tap global capital markets for financing in 2013.


Looking back, during 2012, despite the global financial crisis in 2008 and subsequent downturn in advanced country economic performance, four sovereigns in Asia-Pacific were upgraded —Korea, Indonesia and the Philippines -- while Vietnam and Pakistan were downgraded by one notch each.


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