Asia’s external robustness tested
While global market sentiment concludes ‘cautious optimism’ over the year 2013, international rating agency Fitch Ratings Ltd (Fitch) expects emerging Asia’s macroeconomic performance as a region to outperform its global peers.
Emerging Asia was projected to remain the fastest-growing global region, with growth of between six per cent and 6.5 per cent a year until 2014.
Fitch’s recent sovereign report pointed out that even excluding the still fast-growing China, the rest of the region was expected to grow five per cent in 2012, picking up to 5.5 per cent in 2013 and six per cent in 2014, outpacing global emerging markets (EM) as a whole.
Meanwhile, inflation for the whole region was expected to average at 3.7 per cent a year in 2012 to 2014, close to the 2001 to 2011 average of 3.6 per cent and below the average for all EM of 4.8 per cent a year.
Malaysia and the Philippines bucked the trend with upward revisions for 2013, it stated.
High investments, led by public sector firms, was supporting demand in Malaysia.
Domestic demand in the Philippines was also strong, buoyed by consumption and strong remittance inflows and higher government budget disbursements.
Fitch further pointed out that the robustness of domestic demand in Malaysia and Thailand relative to overall gross domestic product (GDP) growth was particularly striking, with public sector playing an important role in stoking demand in both economies.
However, there were risks arising from a build-up of sovereign contingent liabilities in both cases.
“From a ratings perspective, these risks weigh more on Malaysia’s credit profile given the scale of public investment and borrowing by public corporations and other public bodies there.
“Federal government guaranteed debt rose to 15.2 per cent of Malaysia’s GDP (four-quarter-rolling) by end-September 2012, from 12.2 per cent at end-2010,” it added.
Nine of 11 emerging Asian sovereigns were on stable outlook except for China and India.
Over the past decade, the region had tracked the broader improvement in emerging-market sovereign creditworthiness, and had narrowed the gap with the average for high-income sovereigns to five notches, from eight in the wake of the Asian financial crisis in 1998.
A common theme for many countries was that the pace of sovereign balance-sheet improvement, which was one factor driving positive actions, had stalled.
Investor perceptions of EM were that risk might shift even if global liquidity remained abundant and its preferences might also shift in response to some asymmetric EM-focused shock.
EM had already hosted four of the world’s 12 countries in the highest-risk ‘three’ category of Fitch’s macro-prudential risk assessment framework, China, Mongolia, Indonesia and Sri Lanka, with Hong Kong as a fifth.
Real-terms credit growth accelerated across the region to 10 per cent in 2012 from eight per cent in 2011, and was projected to accelerate again to 10.7 per cent in 2013.
The second half of 2012 (2H12) offered some evidence that emerging Asia’s resilience to external shocks had improved, proving that the region’s external finances were strong.
Gross and net external debt ratios were lower than for other EM regions and the external liquidity ratio was higher, reflecting large foreign reserves stockpiles, which was US$4.7 trillion in aggregate as of end-September 2012, with the bulk contributed by China at US$3.3 trillion.