Asia-Pacific Sovereign Ratings Depict a Region of Relative Stability According to Research from SNL Financial

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Rating changes in the Asia-Pacific region have largely remained stable since the global financial crisis, according to research firm SNL Financial, and growth in the region is predicted to remain strong. However, it remains to be seen how recent policy changes within the largest economies will affect the region; SNL Financial investigates.

Sovereign ratings for select Asian-Pacific geographies since 2010

Sovereign ratings for select Asian-Pacific geographies since 2010

Despite the strong projected growth in the region, questions still remain.

Unlike what has been observed in Europe, sovereign ratings issued by Moody's and Fitch Ratings in the Asia-Pacific region have remained relatively stable over the past few years.

Moody's mentioned in July that it expects ratings to stay that way as the region will likely withstand continued market volatility. Fitch has similar sentiments for the region, saying in October that Asian sovereign ratings are unlikely to be affected by the agency's negative watch for the U.S. sovereign rating, despite Asian governments holding about 26% of U.S. Treasury debt as of July 31.

The recent reports are on par with each agency's outlook at the beginning of the year. In January, Fitch's head of Asia-Pacific sovereigns, Andrew Colquhoun, said the agency expected developing Asia to "remain the world's fastest growing region," and that the main risks to the broader region were external. In a January report, Christian de Guzman, vice president and senior analyst with Moody's Sovereign Risk Group, cited solid macroeconomic fundamentals and a rising reliance on domestic sources of growth as reasons for the stable outlooks in the region.

According to data from the Economist Intelligence Unit, GDP growth is expected to increase between 2013 and 2014 in almost all the largest economies in the region, with China being the one notable exception. Despite a projected modest slowdown in growth, China is still expected to have the highest GDP growth rate in the region through 2016, with steady increases of around 7% per year.

GDP in emerging Asia-Pacific economies is expected to increase by 5.74% on average in 2014, compared to 3.20% growth on average for the more developed economies in the region.

Despite the strong projected growth in the region, questions still remain. Regarding China, the region's largest economy, both Moody's and Fitch are looking to see if government policies can control credit growth, especially in the shadow banking system. Although estimates for the size of the shadow banking system vary, China's top official think tank, the Chinese Academy of Social Sciences, estimates the figure to be around 20.5 trillion Chinese yuan, or 40% of China's GDP.

As Chinese banks have ramped up lending to local governments, debt at the local government level has also been a potential concern mentioned by both agencies. According to Colquhoun, Fitch will be waiting to see if China can "rebalance the economy away from investment toward consumption, which is to rein in growth of credit, including the expansion of the shadow banking systems."

Both Moody's and Fitch said their Japanese sovereign ratings will hinge on the success of policies championed by Prime Minister Shinzo Abe, which aim in part to increase inflation and growth in the nation. Moody's outlook for the country remains stable, but Fitch is less optimistic on the plan. Fitch affirmed the nation's negative outlook on May 16, saying the negative outlook represents the uncertainty over the success of the government's efforts to raise economic growth as well as the lack of a more detailed reform and fiscal consolidation program. Only time will tell if the programs prove to be successful.

Australia and Singapore are the only sovereigns in the region to boast the pristine triple-A rating from both Moody's and Fitch. Singapore has the highest projected increase in GDP growth rates in the region, according to EIU data, while both Moody's and Fitch praised Australia for avoiding a recession following the global financial crisis.

Four of the six largest economies by GDP in the region are rated several notches above the investment-grade threshold, with India and Indonesia being the lone exceptions and sitting only one notch above speculative grade.

Read the full report: http://www.snl.com/InteractiveX/Article.aspx?cdid=A-25591056-12844

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Christina Twomey
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