Weaker growth, debt concerns weigh on Asia-Pacific sovereign credit quality: S&P

Risks associated with a weaker-than-expected global growth, sovereign debt concerns in Europe, and potential tightening in funding conditions weigh on Asia-Pacific's sovereign credit trends, said Standard & Poor's Ratings Services in a report published recently.

The report, titled Asia-Pacific Sovereigns: Is The Positive Rating Trend On Hold?, said the weaker global conditions, combined with domestic inflation and specific weaknesses in some sovereigns, could slow the pace of upgrades for some Asia-Pacific sovereigns (Indonesia and Sri Lanka) and could result in negative rating actions for sovereigns with already weak balance sheets at their rating levels.

Asia-Pacific sovereign ratings have bucked the global trend so far in 2011 with two upgrades (Indonesia and Fiji) to one downgrade (Japan). But several sovereigns in the region face a potential global recession with higher debt burdens and weaker budget positions than what they had in 2008.

"In some cases, the weaker balance sheets are due to the fiscal stimulus measures employed to offset the previous global slowdown," says Standard & Poor's credit analyst Kim Eng Tan. "In others, it was due to the cost of natural disasters adding to fiscal pressures. In the Cook Islands, Japan, Malaysia, New Zealand, and Vietnam, net general government debt levels have risen significantly in the past few years partly for these reasons."

Aside from the growing risk of slower external demand, Asia-Pacific sovereigns are also facing inflation due to higher food and commodity prices.

"Central banks are now caught between the need to tighten monetary policy to head off an increase in inflationary expectations and the need to support the economy through lower interest rates," said Standard & Poor's credit analyst Elena Okorotchenko.