2010 will test Asia-Pacific policymakers

Standard & Poor's Ratings Services takes a closer look at sovereign credit worthiness.

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As economies in the world try to find a firmer footing in a fragile recovery in 2010, sovereign creditworthiness has come under more intense scrutiny. These are the questions we often hear from investors:

  • Can sovereign governments shoulder the growing weight of debts accumulated as a result of unprecedented fiscal stimulus measures?
  • Is there a re-benchmarking of sovereign risk going on? Is the gap in default risk of emerging and developed sovereigns closing?
  • How can one properly factor in the likelihood of government support to state-owned enterprises (SOEs) and resulting contingent liabilities?

Base-case scenario: Global recovery and a complicated policy environment

The strong fiscal and monetary support from governments around the world appears to have helped avert a double-dip recession (See table 1 for key economic indicators). Asia-Pacific sovereigns have -- with few exceptions -- weathered the crisis better than their peers in other regions. The base-case economic scenario underlying Standard & Poor's sovereign ratings is a gradual global recovery. Still, the economic revival remains a fragile affair and its sustenance depends on governments timing well the withdrawal of policy support. Investor sentiment often changes suddenly. We cannot rule out another round of dislocations in western financial markets that would make investors risk averse again and spread volatility to markets in Asia-Pacific. This could complicate funding options for governments that are still expected to be active issuers during 2010.

Table 1
Asia-Pacific Economic Outlook

Real GDP Growth Consumer Price Inflation General Government Balance Current Account Balance
Country 2009e 2010f 2009e 2010f 2009e 2010f 2009e 2010f
Australia 0.9 3.0 1.8 2.6 (2.3) (4.7) (4.3) (4.3)
Cambodia (2.5) 4.0 2.0 4.0 (4.0) (3.0) (5.0) (6.0)
China 8.7 9.3 (0.5) 2.0 (3.4) (3.4) 5.9 6.5
Cook Islands (0.9) 0.8 10.3 5.7 (0.9) (21.4) 9.8 10.6
Fiji (2.5) 1.8 7.5 7.0 (3.0) (3.5) (22.0) (16.0)
Hong Kong (3.5) 3.5 (0.5) 1.5 (4.0) (1.5) 6.4 6.6
India 6.2 7.6 7.4 7.0 (10.6) (10.2) (0.9) (1.5)
Indonesia 4.3 6.0 5.3 6.4 (0.8) (1.2) 0.8 1.1
Japan (5.5) 1.2 (1.3) (1.0) (10.4) (10.1) 2.8 3.4
Korea 0.2 4.1 2.9 3.2 (2.5) (0.5) 3.8 1.4
Malaysia (2.7) 3.5 0.6 2.9 (8.0) (7.7) 14.0 14.6
Mongolia 0.5 4.5 9.2 8.5 (9.0) (5.0) (7.0) (4.5)
New Zealand (1.2) 2.5 2.0 2.1 (5.6) (6.3) (1.9) (4.7)
Pakistan 2.0 4.0 20.8 6.0 (4.4) (4.2) (6.1) (3.5)
Papua New Guinea 5.0 4.0 6.1 6.5 (4.1) (1.4) (7.8) (6.5)
Philippines 1.0 3.5 3.9 4.5 (3.5) (1.0) 3.2 3.5
Singapore (2.0) 4.0 0.0 2.5 (2.0) 3.0 10.2 15.0
Sri Lanka 3.5 6.0 5.5 8.0 (8.0) (7.5) (2.8) (3.0)
Taiwan (3.5) 4.5 (1.0) 1.5 (5.1) (3.5) 7.6 8.5
Thailand (3.4) 3.3 (1.2) 1.5 (1.9) (0.8) 6.3 3.6
Vietnam 5.3 6.2 6.9 8.0 (6.7) (4.1) (2.1) (1.4)
Source: Standard & Poor's; e -- estimates; f -- forecasts

Monetary and fiscal stimuli have not been without negative consequences. Policy-spurred liquidity and credit growth are feared to have contributed to new asset bubbles and bad loans. Sizeable government subsidies and investments -- often debt financed -- have led to overcapacity in some sectors, price distortions in others, and soaring government debt burdens.

Asia's sovereigns have also shown significant support to their GREs in the past 18 months, often to avoid wider systemic problems. With the GREs borrowing more -- often on behalf of the government or for government-specified programmes -- and government stimulus often channelled through the domestic banking systems, the level of contingent liabilities has increased, in our view.

At the same time, structural imbalances contributing to the global recession remain largely unresolved. Countries with large current account deficits are now looking to increase exports. In countries with current account surpluses, rebalancing from export-led to domestic-driven growth has become an important priority for policymakers. However, moves to stem currency appreciation are slowing progress in global rebalancing. They also risk triggering capital and trade protectionism measures that could harm economic growth.

All this speaks to a complicated policymaking environment for the next few years. For rebalancing to occur, the major economies have to identify new sources of medium-term economic growth. Many governments are under pressure to find ways to reduce public debt over the medium term. Monetary authorities face the risks of resurging inflation and asset bubbles as economic activity picks up.

A few factors help determine which Asia-Pacific sovereigns can deal with these challenges successfully and sustain additional debts without a detrimental impact on their creditworthiness. Chief among the factors are: (1) the sovereigns' projected debt and structural deficit levels relative to peers; (2) the flexibility and wealth of domestic economies, the speed of economic recovery, and thus any additional stimulus needed on the way out; (3) their ability to formulate and implement effective policy responses--a credible medium-term plan for fiscal consolidation could be one key component; and (4) any additional idiosyncratic issues affecting their creditworthiness--political, economic, external, etc.

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