KUALA LUMPUR: The outlook for Asia Pacific (APAC) sovereigns has shifted to negative, given the anticipated slower regional growth and persistently tight funding conditions.
According to a recent report by Moody’s Investor Service, this will impede governments in achieving deficit consolidation and debt reduction, leading to larger debt burdens and a notable decline in debt affordability due to higher interest rates. The agency said the interest rates are expected to stay elevated in APAC, with central banks likely having reached their peak policy rates, the decline in interest rates will be gradual. There is a possibility of occasional rate increases to mitigate unexpected inflationary pressures.
Additionally, pressures on capital outflows and currencies in APAC, excluding China, may stabilise with the easing of monetary policy in the US, it said. Moody’s Investor Service further said while growth is expected to decelerate in 2024, the region will still outperform most others. It said the slowdown in China’s growth trajectory is anticipated to have a spill-over effect through various channels like trade, commodity prices, and investment. “However, the impact will be mitigated by strong domestic demand in significant emerging markets, including Indonesia (Baa2 stable) and India (Baa3 stable),” Moody’s Investor Service report said.
Moody’s Investor Service also noted that geopolitics will persist as a prominent factor, with ongoing trade and technology competition between China and the US disrupting supply chains. “Amidst this disruption, economies with robust manufacturing bases and excellent infrastructure, such as Vietnam (Ba2 stable), Thailand (Baa1 stable), and Malaysia (A3 stable), may find opportunities. “Additionally, an escalation of military conflicts in the Middle East poses additional risks to supply chains,” it said.
The agency said the proportion of stable outlooks in APAC across sectors has decreased from the previous year, indicating a less robust economic environment. In 2024, both non-financial companies and financial institutions in China are expected to grapple with challenging credit conditions, in contrast to their counterparts in the rest of APAC, which maintain a stable outlook. Non-financial companies heavily dependent on the high-yield market will continue to face heightened refinancing risks.
Moving on, Moody’s Investor Service noted that the APAC region’s growth prospects face constraints due to China’s declining growth profile and a cyclical slowdown in the US, exacerbating challenges in deficit consolidation and debt reduction amid tight funding conditions and slow growth. Post-Covid, emerging and frontier economies like Pakistan and Sri Lanka experience increased debt burdens and reduced debt affordability due to higher interest rates.
However, it said the easing policy rate tightening in the US may alleviate currency pressures for sovereigns across rating spectrums, although APAC currencies have weakened against the strong US dollar since 2022. Stabilisation in exchange rates could offer relief to holders of foreign currency debt. While some APAC governments have reduced exposure to foreign currency borrowings after Covid-19, certain frontier market sovereigns, including Sri Lanka, Laos, and Mongolia, maintain high levels of such debt.
Nonetheless, countries like Cambodia, the Solomon Islands, and Bangladesh benefit from concessional terms on foreign currency-denominated debt, mitigating liquidity risks and currency mismatches. Mongolia has recently refinanced and decreased its exposure to maturing external financing obligations.
