The credit rating agency is confident that the majority of policy makers have learned the hard lessons of the Asian financial crisis, and that economies around the region have improved their banking systems, reigned in fiscal deficits, reduced external debts, enhanced foreign exchange reserves, and balanced their current accounts.
However, the search for higher yields by foreign investors and the resulting capital inflows has created difficulties for some central banks, while current marker volatility has caused uncertainties for investors, borrowers and policy makers.
In addition, the bull-run in credit in the period prior to the subprime crisis allowed many lower-rated companies to tap the markets, with over half the issuers exposed to outstanding debt rated sub-investment grade.
ôHence in an environment in which sovereign and banksÆ credit worthiness are improving, the vulnerability of the corporate sector to a capital outflow or liquidity crunch could be increasing,ö says credit analyst Ping Chew.
However, the report observes that a significant reduction in external debt has eased worries of currency depreciations. Meanwhile, foreign participation in domestic markets still remains small, thereby mitigating the risk of capital outflow.