Most Asia Pacific countries are looking resilient enough to handle the impact of the just announced plan by the United States Federal Reserve to further cut stimulus spending, but their economies are likely to face headwinds from other external and domestic factors.
Most of these countries, especially China and South Korea, are well placed to deal with the increase in the cost of investment and reduced availability of international funding as a result of the tapering of the bond-buying program by the US Fed, Moody’s Investors Service said in its “Sovereign Outlook: Asia Pacific” report.
“Going forward, most economies in the region will be resilient to the reduced influx of capital, in large part thanks to their low share of foreign currency debt and ample fiscal buffers that give them scope to apply stimulus measures if necessary,” it said.
However, it sees Indonesia and the Philippines as most susceptible to currency depreciation owing to their sizeable shares of government debt denominated in foreign exchange.
“But whereas the Philippines has strong capacity to fund itself onshore in the event of an interruption to international inflows, a large amount of Indonesian debt is held by non-residents and it is, therefore, very reliant on external funding,” the credit ratings agency said.
Moody’s warned that Asian governments may face challenges from high levels of household and public-sector enterprise debt, as well as domestic politics.
In several countries around the region, there has been a substantial build-up of debt among public sector enterprises and households. These debts could constrain the economies’ ability to grow and could, in an extreme scenario, necessitate official intervention, putting a burden on government balance sheets, it said.
Household debt as a share of gross domestic product (GDP) is highest in Australia, Taiwan, Malaysia, Thailand, Korea and Singapore.
Moody’s also said that despite the region’s resiliency to the US tapering, a cooling China economy and the relatively muted recovery in the US and the European Union pose challenges to the ability of these countries to sustain their relatively strong economic performance.
It said that China, the most dynamic major economy in the region, is facing new challenges as the authorities attempt to curb credit growth and orchestrate a transition to a less investment-intensive growth model.
“A consequence will likely be a weaker rate of economic expansion, which will dampen the performance of its Asian neighbors,” the ratings agency said.
On the brighter side, the report said that upcoming and ongoing elections in some countries provide potential for new administrations to capitalize on fresh mandates to implement structural reforms. But continued political turmoil in Thailand raises the risk of a protracted period of weak growth, it added.