Moody's says India, other Asia Pacific economies can withstand external shocks

23 Apr 2015


Rating agency Moody's today said the US Federal Reserve's shift to a tighter monetary regime from a policy of monetary expansion would not constrain emerging economies in the Asia Pacific region, including India, as these economies have a high degree of immunity to external shocks.

However, Moody's admitted that the countries will face challenges when the US Federal Reserve begins raising interest rates. However, these economies would be able to withstand the consequent reverse fund flows, Moody's said.

"A common challenge for emerging economies in the region will come when the US Federal Reserve begins to raise interest rates.

"Asia Pacific sovereigns generally exhibit strong external payments positions and government debt profiles relative to peers elsewhere in the world - factors that should stand them in good stead," Moody's Investors Service said.

However, Moody's Investors Service said the rating momentum is diverging as some drive through ambitious reforms, while others struggle with long-standing challenges. A key risk for credit quality is therefore whether governments can deliver on policy pledges.

Moody's notes that four sovereigns in Asia Pacific - India (Baa3), Korea (Aa3), Malaysia (A3) and Pakistan (Caa1) - have positive rating outlooks, while one, Mongolia (B2), has a negative outlook.

China's (Aa3 stable) slowing growth and a lackluster global economy will dampen export performance in Asia Pacific in the year ahead, and thus weaken a historically key driver of regional output. Commodity exporters in the region will be most adversely affected by China's "new normal" of slower economic growth, Moody's says.

As most Moody's-rated sovereigns in Asia Pacific are net oil importers, the recent slump in oil prices will have a largely positive impact on the region. Savings on energy costs will support sovereigns in their efforts to rein in budget deficits or rebuild fiscal buffers, Moody's notes.

Moody's analysis is contained in its just-released report entitled `Sovereign Outlook - Asia Pacific: Credits diverge on domestic factors; resilience to external risks is high.'

The report, part of Moody's regular series of annual regional sovereign outlooks, expresses Moody's expectations for fundamental sovereign credit conditions in the Asia-Pacific region over the next 12-18 months. The report, however, is not intended to be an outlook for the rating of specific economies.

Moody's report points out that household debt remains elevated in several economies around the region, but that it does not pose imminent or significant risk to financial system stability. However, such debt will dampen private consumption growth, which could constrain economic expansion. Moreover, since a significant proportion of retail loans charge variable rates, consumers are directly exposed to rising global borrowing costs, which could amplify pressures on household balance sheets.

Moody's also notes that because Europe is a major destination for Asian exports and source of financing for countries in Asia Pacific, an increased threat of Greece leaving the currency bloc could hurt growth in Asia.

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