Emerging Asia needs sound economic policies as growth prospects sag, Fitch warns
Credible, coherent economic policy management by authorities in emerging Asia will likely be the central factor in determining regional sovereign credit outlooks, as the economies face their weakest growth prospects since 1998, Fitch Ratings says in a spe
Fitch believes the two main factors affecting the growth outlook for emerging Asia are tighter global monetary conditions as the US Federal Reserve tapers quantitative easing, and downward pressure on non-fuel commodity prices from China’s slowdown.
The currency and asset-price volatility over recent months points to the market’s continuing reassessment of emerging Asia’s prospects.
Fitch in its September "Global Economic Outlook" cut its projection for emerging-Asia growth to 5.7 per cent for this year and 5.8 per cent next year, from 6.4 per cent and 6.5 per cent at the December 2012 forecast
round.
Fitch believes the main factors weighing on growth in gross domestic product are likely to be long-lasting, implying a structural downshift in growth expectations. Excluding China, the region’s GDP-weighted nominal effective
exchange rate fell 6.7 per cent by end-August from end-2012. Again excluding China, aggregate regional foreign-exchange reserves were down 7.2 per cent over the same period.
Countries experiencing the greatest pressure on their currencies and reserve levels are those where weakening current-account positions and persistent inflationary pressure have raised doubts over the credibility of policy management – India and Indonesia in particular.
Fitch sees limited scope for policy slippage for either sovereign at the current rating levels of "BBB-" with stable outlook. Malaysia ("A-"/negative) and Thailand ("BBB+"/stable) have likewise seen erosion of their current-account surpluses. Inflation has been lower and more stable in both countries than in India or Indonesia.
The reduction of Malaysia’s current-account surplus partly reflects heavy public-sector investment spending and so is a "twin deficit" – a key factor behind the assignment of a negative outlook to the ratings in July.
Thailand has a combination of a sharp slowdown in activity, near-zero real interest rates, a current account hovering on the brink of deficit, and an expected material rise in its fiscal deficit in 2014 that could affect the credit profile and investor confidence.
However, the country’s large net external creditor position and moderate public debt offer important buffers. Nonetheless, high and rising household debt add to the risks for both economies.
Fitch does not see a repeat of the region’s 1997-98 financial crisis as likely at this time because of stronger regional sovereign credit profiles – in particular, external balance sheets. Emerging Asia, excluding China, has six months of imports in reserve now in aggregate, against less than four months in 1996.
Indonesia, Malaysia and Thailand ran current-account deficits of 3.4 per cent, 4.4 per cent and 8.1 per cent of GDP respectively in 1996, against a 3-per-cent deficit, close to balance and a 3-per-cent surplus respectively projected for this year.
