Moody's Investors Service says that the 2017 outlook for the creditworthiness of sovereigns in Asia Pacific is stable overall, reflecting a mix of credit-supportive and credit-challenging factors.
Rising income levels and strengthening institutions will offer support to several sovereign credit profiles in the region. However, although GDP growth in the region remains relatively robust, lackluster growth in global trade and capital outflows may weigh on the credit profiles of those more dependent on external demand or financing.
Given this context, credit outcomes in 2017 will be determined by the effectiveness of ongoing reform efforts and the evolution of political risks.
Moody's analysis is contained in its just-released report titled "Sovereigns — Asia Pacific: 2017 Outlook — Stable Outlook Balances External, Political Risks Against Economic, Institutional Reforms."
The report explains that most Moody's-rated sovereigns in Asia Pacific carry ratings with stable outlooks, but negatives outlooks outnumber positive ones.
Specifically, in terms of the 24 sovereigns that Moody's rates in Asia Pacific, there were 18 stable outlooks as of 10 January 2017, four negative and two positive.
Moody's further points out that rating actions in 2016 were overwhelmingly negative, with 10 negative and only one positive over the course of the year.
Sources of shock
The sources of shock have varied, but in 2016, 38% of rated Asia Pacific sovereigns experienced a decline in their fiscal strength, while for 42%, Moody's sees a higher susceptibility to event risk when compared with the situation the year before.
Moody's GDP growth forecasts already take into account expectations of slow global trade, which are particularly relevant for export-reliant economies like Hong Kong (Aa1 negative), Korea (Aa2 stable), Singapore (Aaa stable) and Taiwan (Aa3 stable).
The report points out that in the context of downside risks to the global growth outlook and the possibility of faster increases in US interest rates than investors currently assume, capital inflows to emerging markets could taper abruptly.
Direct exposure to capital flows is highest when financing needs are large to cover current account or external debt payments. In Asia Pacific, Mongolia (Caa1 stable), and to a lesser extent, Sri Lanka (B1 negative), Malaysia (A3 stable) and Indonesia (Baa3 stable), are among the most vulnerable.
In China (Aa3 negative), large official reserves provide ample external liquidity. However, tighter external financing and potentially increasing capital outflows could limit the effectiveness of domestic financial policies.
Key driver of sovereign credit trends
In addition to external trade and financing pressures, a key driver of sovereign credit trends will be the policy efforts of governments themselves. Moody's points out that authorities are formulating policies that range from those that address acute near term challenges to those that set the stage for longer-term improvements in credit profiles.
However, capacities to implement these policies differ across countries as evident in Moody's scores for Institutional Strength, which vary greatly across the region.
The capacity of governments to implement measures and the effectiveness of policies in achieving the respective governments' objectives will shape the sovereigns' credit profiles over the coming year. In particular, in India (Baa3 positive), Indonesia (Baa3 stable) and the Philippines (Baa2 stable), ongoing implementation of reforms is likely to boost medium-term growth.
Moody's notes political risk is unlikely to abate in 2017, pointing out that latent political risk that prevailed in parts of APAC has, in some cases, flared up. Were domestic or geopolitical tensions to escalate, they would exacerbate the negative credit drivers or derail credit-supportive factors in the region.
For instance, political developments could interfere with the ability of governments to implement reforms and would exacerbate the negative growth impact of slower global trade and capital flow reversals.