Sovereign Credit Fundamentals: Matching Asia Against the World

Asian countries have good growth prospects, but display below-par fiscal performances which require a commitment to policy change.

In simple terms, comparing rated Asian sovereigns with global peers provides the following crude indicators: lower incomes, more robust growth prospects, worse public finances, considerably better external position, and mixed monetary achievements with lower inflation, but weaker financial systems. Seven years on, the financial crisis has left lasting imprints on Asian economies.

This article provides an overview of the key credit fundamentals of Asian sovereigns, and a general comparison with their global peers across the rating scale.

Standard & Poor's methodology for rating sovereign governments is based on global criteria (see 'Sovereign Credit Ratings: A Primer', published March 2004, and 'Sovereign Credit Characteristics by Ratings Category', published November 2003). Although the criteria encompass five main analytical areas - political, economic, fiscal, monetary, and external - this article excludes the first. Comparison is conducted across each rating category and uses key quantitative indicators and projections from 2000 to 2004.

Comments below are based on medians and averages from a relatively small sample; outliers would have distorted the picture. Political systems and economies are diverse in Asia. Singapore is the only 'AAA' rated Asian sovereign, but has parameters very different from other 'AAA' rated sovereigns, such as its huge current account surplus to GDP.

The characterizations made here are also high level, and omit many underlying features that appear with deeper analysis. Such generalizations are also limited because they forego salient factors that distinguish the creditworthiness of an individual sovereign. To narrow the focus, Standard & Poor's criteria for political risk and policy risk are not discussed here, although these elements are critical, but unquantifiable, when assessing sovereign ratings, and it is difficult to include in a comparison of this nature.

Japan was the first Asian sovereign to be rated, in February 1975. Vietnam is the most recent Asian member, with ratings assigned in May 2002. Of the 101 sovereign governments rated by Standard & Poor's, 14 are in Asia and four in the Pacific. Asian sovereigns straddle almost the entire rating spectrum from 'AAA' rated Singapore to 'B' rated Papua New Guinea (although strictly part of the Pacific).

Economic Structure and Prospects

The first of the four areas of comparison is the real economy. The Asian financial crisis in 1997 did not put an end to Asia's growth momentum. Asian sovereigns have generally achieved faster GDP growth - including that on a per capita basis - than global peers. Papua New Guinea is the exception. This robust expansion stems partly from favorable natural endowments, diverse and resilient economic structures, and higher labor and capital inputs, but also an initially lower economic and income base.

Exports remain a key feature in many Asian economies.

The ratio of current account receipts to GDP is higher than global peers, except for Japan, China, India, and Pakistan in their respective rating category.

Per capita income is generally lower by rating category, bar Japan and Hong Kong. Average and median savings rates, however, are significantly higher, except for Pakistan, debunking the myth that low savings rates are found in low income and developing countries. These high rates, however, are also due to generally less-extensive (or the absence of) government-sponsored social safety nets, which create heightened personal uncertainty and greater need for savings. In addition, there is less available bank and capital market financing for small and midsize enterprises, and therefore greater reliance on internally generated funds; as well as a high mix of governmental capital expenditure, not all of which has been effectively targeted. Investment as a percentage of GDP is globally comparable, except for China, which is leagues ahead.

Fiscal Flexibility

Small government is a characteristic found generally in Asia. General government expenditure and revenue to GDP are, across the rating categories, significantly lower than global peers, except for Mongolia, which inherited a socialist system. This is true, despite many governments having to maintain fiscal pump-priming to counteract the effects of the financial crisis and external shocks.

Once again, the low level of expenditure is partly due to generally less-elaborate social security systems, bar those in Japan and Mongolia. The lower level of revenues is also partly due to the narrow base of government revenue and/or the ineffectiveness of tax collection, with obvious Real GDP Per Capita Growth (2000-2004) Chart 2 Gross Savings/GDP (2000-2004) Chart 3 examples in India and the Philippines. Asian sovereigns have also been known to engage in tax competition in a bid to attract foreign direct investment. However, many headline ratios do not capture quasi-fiscal activities, often extended through state-owned or state-majority banking systems; for example, banks are used often as an extension of budgetary tools in China through directed lending, and in Thailand through recent micro-financing and subsidized housing loans. Asia also has more centralized revenue generation and spending mandates, as seen in the greater proportion of central government revenue and expenditure in general government flows.

There are fewer instances of regional and local government imbalances threatening central government fiscal levers and demand management. India is one of the few exceptions. Extensive public service provision at China's local government level also masks central government fiscal pressures.

Asian governments have performed poorly in their budgets, except Singapore (which has one of the highest general government surpluses worldwide), Korea, Thailand, and Indonesia in their respective categories.

Other than those in the 'B' category, Asian governments' deficits are higher than peers, reflecting some off-budget activities, but not including quasi-fiscal activities.

The debt levels of Asian governments, subsequent to, and also because of, banking sector recapitalization after the financial crisis, are higher than their peers. The ratios of net general government debt to GDP and revenue - except Singapore, Taiwan, and Hong Kong - are generally higher, with several governments the most indebted in their rating category. This tendency toward high debt ratios is partly due to the low GDP denominator and the inability of several governments to raise revenue. The resultant debt-servicing burden as a ratio of general government interest to revenue is higher. Vietnam and Mongolia benefit from a lighter servicing burden because of the substantial portion of concessional multi- and bilateral loans.

Concerns over liquidity and sustainability, however, are alleviated by recourse to domestic financing. Most Asian governments can tap the high savings and deposits base of their often financially repressed economies with only muted impact on interest rates. These range from highly rated Japan and Taiwan to India. Favorable debt profiles through local currency fixed-rate funding also allay concerns, except for a notable example like the Philippines, where half the debt is denominated in foreign currency, making its debt dynamics vulnerable to exchange rate fluctuations.

Despite their already higher debt burden, Asian governments also have larger fiscal risks, reflecting the higher contingent liabilities from the banking system.

Largely thanks to their dominant and important, but weak, banking system, Asian governments' contingent risk (using Standard & Poor's methodology of combining domestic credit to private sector and gross problematic assets in a reasonable worst-case scenario) are significantly larger than peers, who often have smaller, but healthier, banking systems in proportion to their economy. Japan, Taiwan, China, Malaysia, Thailand, and Vietnam have substantial contingent liabilities relative to peers, based purely on their size of their banking system and the quality of their assets. Korea has the added fiscal risk of possible unification costs.

Monetary Environment

Asian central bankers, who in some countries are nonindependent arms of government, have done better than their peers in inflation performance, with CPI rates lower than peers. Papua New Guinea has fared worse, however.

A qualification to this assertion is that deflation has been damaging in China, Japan, and Hong Kong. Monetary management could be also challenging for regional governments and central banks once the current benign low inflationary global environment has turned. Monetary growth has often lagged individual nominal GDP growth and that in global peers, except in China, India, Vietnam, Mongolia, and Pakistan. The high growth rates in these exceptions are due partly to a changing economic structure and unstable money demand function. It is also partly due to unsophisticated lending practices. Credit growth has been generally lower in Asia because of recovery in the banking system and the weak investment climate.

Capital inflows to the region and the stockpiling of reserves by many Asian sovereigns have also complicated monetary management.

Capital markets in Asia, especially emerging Asia, are not as mature as elsewhere. This is partly reflected in the predominance of the banking system as the chief, and often only, channel of intermediation between savings and usage of capital. There are some well-developed equity and government bond markets, for example in Hong Kong and Korea, although regionally corporate bond markets are still budding. The transition from banks to multichannel financing challenges monetary management. This is further compounded by Asia's current account surpluses, capital inflows (including foreign direct investment), and managed or fixed exchange rate systems. The current environment of abundant liquidity complicates China's interventionist approach to exchange rates and credit allocation. Most Asian economies are fully liberalized in the current account, although there are a few notable proponents of capital controls and fixed exchange rates in Asia.

External Finances

The external position is the area in which Asian sovereigns excel by the greatest margin. Almost all indicators of external finances - including current account and trade balances, public, banking and non-banking external debt, and liquidity and servicing burden - show Asian sovereigns to be in stronger positions than their global peers. Many do not have the benefits of having a key international currency, bar Japan, and are not in a monetary union with a highly rated central bank, such as those inside the European Monetary Union. Despite this, most Asian sovereigns are net public creditors and their economies net capital exporters, except for the lowly rated such as Pakistan, Indonesia, and Mongolia, although the Philippines' net public external debt burden is no higher than the 'BB' median. Asia's comparative strength reflects its dynamic export growth, steady inward FDI, low reliance on external funding, and informal policies of stockpiling reserves in order to maintain export competitiveness. The seven greatest holders of foreign exchange reserves are all Asian Current Account Balance/GDP (2000-2004) Chart 11 Gross Financing Requirement*/Reserves (2000-2004) Chart 13 sovereigns. Korea, the Philippines, and Indonesia's private nonbank sector, however, still rely on external financing.

Most sovereigns and their private sectors have small amounts of short-term debt, mainly due to more prudent debt management after the Asian financial crisis.

Many Asian sovereigns' weaknesses lie on their high fiscal debt. The fairly low-cost currency funding, low level of external debt (or high foreign exchange reserves coverage) and light external debt servicing burden reduces the probability fiscal deficits from affecting the external accounts as much as elsewhere. This can be seen across the rating scale, from Japan, to China, India, and Mongolia.


There are many similar credit fundamentals that unite Asian sovereigns as well as differentiate them. This attempt at generalization, however, at best gives only an overview that Asia has well-above average external strengths and good growth prospects, but below-par fiscal performances and challenging monetary environment. The external positions of Asian governments have improved and restored since the 1997 Asian financial crisis, but there remain many domestic imbalances and reforms that will require policy commitment.

by Ping Chew, S&P Singapore (65)6239-6345

Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020.

Copyright 2004 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Officers of The McGraw-Hill Companies, Inc.: Harold W. McGraw, III, Chairman, President, and Chief Executive Officer; Kenneth M. Vittor, Executive Vice President and General Counsel; Robert J. Bahash, Executive Vice President and Chief Financial Officer; Frank Penglase, Senior Vice President, Treasury Operations.

Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor's or others, Standard & Poor's does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information.

Standard & Poor's receives compensation for rating obligations. Such compensation is normally paid either by the issuers of such securities or by the underwriters participating in the distribution thereof. The fees generally vary from US$5,000 to over US$1,500,000. While Standard & Poor's reserves the right to disseminate the rating, it receives no payment for doing so, except for subscriptions to its publications. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Ratings are based on information received by Ratings Services. Other divisions of Standard & Poor's may have information that is not available to Ratings Services.

Standard & Poor's uses web usage, billing, and contact data collected from subscribers and registered users for billing and order fulfilment purposes, for product development and/or enhancement purposes, and occasionally to inform subscribers about products or services from Standard & Poor's and The McGraw-Hill Companies that may be of interest to them. Additionally, we may use subscribers' and registered users' contact information from time to time to inform them about new features, additions, and changes to Standard & Poor's products or services. If you would prefer not to have your information shared outlined in this notice, or for more information on our Privacy Policy, call us at (1) 212-438-7280 or see The McGraw-Hill Companies Customer Privacy Policy You can also call us to confirm the accuracy of the data we have collected from you.

This report and the ratings contained within it are based on published information as of July 8, 2004. Subsequent information may result in the assignment of ratings that differ from the ratings published here. Please call Standard & Poor's at (852) 2533-3500 or (65) 6438-2881 for the most recent ratings assigned.