Moody's Investors Service says that its 22 rated Asia Pacific sovereigns are generally well positioned in terms of their ability to respond to possible economic or financial shocks in 2015 because most have a low reliance on external funding and have built up a number of strong buffers against shocks.
From a broader perspective, Moody's says the global sovereign outlook for 2015 is also stable as a gradual global recovery supports credit quality. However, GDP growth rates for sovereigns globally are likely to remain lower than the levels seen before the global financial crisis in 2008-09.
Moody's conclusions were contained in its annual Global Sovereign Outlook. The report identifies four possible drivers of sovereign credit quality in 2015:
1) The possibility of confidence shocks from the expected rise in US interest rates, especially in the case of a disorderly market reaction
2) The impact of lower than anticipated growth in China and the euro area
3) The overhang of geopolitical risk, (although this currently appears unlikely to exert influence on credit profiles in Asia Pacific)
4) The ability and willingness of governments to undertake structural reform
Moody's report notes that China (Aa3 stable), Hong Kong (Aa1 stable), Korea (Aa3 stable) and Singapore (Aaa stable) in particular exhibit healthy external surpluses and are therefore well placed to ride out tighter global liquidity conditions stemming from an expected rise in US interest rates in 2015.
While Malaysia (A3 positive), the Philippines (Baa3 positive), and Thailand (Baa1 stable) will benefit from higher US growth in 2015, a disorderly market reaction to US rate hikes could pose a risk, due to elevated household debt in Malaysia and Thailand, and the significant — although decreasing — share of government debt denominated in foreign currency in the Philippines.
However, in all three cases, given compensating factors, including projected current-account surpluses, Moody's does not expect significant sovereign credit distress, even if global liquidity tightens substantially.
On India (Baa3 stable), the report says that although inflation and the current account deficit have declined over the last year, a tightening in US monetary policy could still result in some volatility in capital inflows and the exchange rate.
Indonesia's (Baa3 stable) current account deficit and the significant proportion of government debt held by non-residents expose it to the possible adverse impacts of a rise in US interest rates.
Moody's report also says that if China's growth slows significantly below the approximately 7% that Moody's expects in 2015, raw material exporters — such as Australia (Aaa stable), Indonesia and Mongolia (B2 negative) — would be particularly vulnerable.
While economies with strong financial and commercial ties to China — namely Hong Kong, and those with strong trade ties, such as Korea, and Taiwan (Aa3 stable) — are also vulnerable to a sharp and prolonged slump in Chinese demand, they would benefit from the expected strengthening in the US economy; an important trading partner for all three economies.
On structural reform pressures that will affect sovereign credit quality, Moody's report notes that the Japanese government (Aa3 stable) faces the challenge of overcoming the tensions inherent in achieving both fiscal consolidation and a higher economic growth rate.
Of the 22 sovereigns that Moody's rates in Asia Pacific, two carry positive outlooks, 19 have stable outlooks, while one carries a negative outlook.