Moody's Investors Service has adjusted downwards its GDP growth forecasts for many Asia Pacific (APAC) sovereigns, noting that subdued global growth, exacerbated by weaker demand from China, leads APAC growth lower. Nevertheless, APAC sovereign credit profiles are resilient to lower growth, because most other APAC sovereign credit indicators, such as government debt and balance of payments ratios, remain in line with Moody's assumptions, and within the range for each sovereign's peer group. Moody's conclusions are contained in its just-released report titled "Asia Pacific Sovereigns: Credit Profiles Resilient to Slowing Exports, Subdued Domestic Demand". The report describes the adjustments to each rated Asian sovereign's growth forecast, as well as the reasons behind Moody's lower growth expectations. It highlights that weak demand from China (Aa3 stable) has dampened the overall export outlook for the region, while softer commodity prices weigh on some sovereigns' export revenues, growth and fiscal balances. Moody's report says that domestic demand in most APAC countries is unlikely to offset the effect of slower global growth, partly because an anticipated investment boost from government infrastructure spending has not materialized in some cases. In addition, households are saving more of their income gains from lower energy costs than previously expected, despite monetary easing by central banks in the region. Market volatility and political risk are also weighing on confidence. Nonetheless, Moody's sees most APAC sovereign credit profiles as resilient to the ongoing slowdown in global growth. The report points out that growth in Asia is slowing from high levels, and is on average still stronger than most other regions. The risk of deflation at this point is minimal, while lower oil prices have supported current account and fiscal positions in many Asian countries; offsetting the risks from slower growth and external financial volatility. In addition, government debt-to-GDP levels are largely moderate in much of Asia -- except in India (Baa3 positive), Japan (A1 stable), Pakistan (B3 stable) and Sri Lanka (B1 stable) -- offering some space for fiscal stimulus. On capital account volatility, Moody's expects that the pressures on exchange rates and reserves in many Asian countries will continue, as international markets respond to slower emerging market growth, and potential US Federal Reserve action. Nevertheless, the negative sovereign credit implications of such pressures are limited by currency flexibility, and reserve levels that are significantly higher in Asia than during the late nineties.
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