Domestic factors to support Asean-5, India


A Flexible exchange rate, fiscal and monetary policy vigilance and efforts to revive domestic sources of growth will support the sovereign credit profiles of the five largest Southeast Asian economies and India, Moody’s Investors Service said.

In a new report, the debt watcher noted that India and the so-called Association of Southeast Asian Nations-5 (Asean-5) — Indonesia, Malaysia, the Philippines, Singapore and Thailand – were experiencing varying degrees of pressure on their respective currencies.

“Over the last year, the depreciating currencies of the Asean-5 and India vividly illustrated the impact of weaker global growth and tighter financing conditions,” it said.

These pressures may persist in 2016, Moody’s said, as a slowdown in China curbs export growth and monetary policy tightening by the US Federal Reserve weakens net capital inflows.

In particular, it noted that capital outflows this year had knocked reserve levels in the Asean-5, with the Philippines being the exception.

“Capital outflows from the Philippines have been quite mild given its strong economic fundamentals and relatively stable policy outlook,” Moody’s said.

The ratings firm added that although investors may have largely discounted US monetary tightening and slower growth in China, the six sovereigns are still likely to see capital account pressures whenever unfavorable data are released or even when anticipated global events — such as a Fed rate hike — occurs.

As external conditions are now more challenging, it expects respective authorities to focus on reviving domestic growth.

Moody’s said domestic factors would be the key determinants of the broad direction of capital flows; in particular, whether policies appear likely to revive growth without weakening fiscal, inflation and current account positions.

“Therefore, in 2016, fundamental sovereign credit trends and market sentiment toward particular countries will be determined by whether their respective governments are able to catalyze domestic sources of growth, without weakening their fiscal, inflation and current account,” it said.

Moody’s however, does not expect a significant fiscal boost to growth, particularly in the case of Indonesia and the Philippines where the track record suggests that large-scale public investment may be difficult to implement.


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