Standard & Poor’s has warned that sovereign ratings across the Asia-Pacific will weaken in the next two years, as nations face limited policy options and the winding down of US quantitative easing.
The ratings agency today released a regional report card, titled “Gravity Tugs At Asia-Pacific Soverign Ratings As Global Risks Persist And Domestic Challenges Grow”.
Of the 22 nations rated, S&P said none had a positive outlook, while three – India, Japan and Mongolia – were expected to worsen.
From the report:
The positive trend of Asia-Pacific sovereign ratings looks likely to break in the next one to two years. We don’t see a high likelihood of a sovereign rating upgrade during that period.
The unexpected delay in the rebound of the large economies is one reason for this change in trend. Another is the specter of US quantitative easing being wound down.
But we believe the most important reason is that policy responses by some sovereigns may be insufficient to maintain their credit fundamentals in this environment.
Australia, Hong Kong and Singapore were the top-rated of the group, sharing an S&P foreign currency rating of AAA/Stable/A-1+.
S&P analyst Craig Michaels forecast Australian GDP growth to fall from 2.9% this year to 2.5% in 2014, before gradually strengthening, and inflation to rise from 2.3% in 2013 to 2.4% in 2014.
He highlighted Australia’s political stability, resilient economy and “low public debt and strong fiscal discipline” as strengths.
However, Australia also faced a high external debt burden, high household debt, and was particularly vulnerable to weakening commodity export demand, especially from China, he reported.
From the S&P report:
The stable outlook is based on our assumption that Australia’s historically conservative budgetary policies will remain in place, such that fiscal deficits continue to narrow and that the general government debt burden will remain low.
We may lower the ratings if external imbalances grow significantly more than we currently expect, because either the terms of trade deteriorates quickly and markedly, or the banking sector’s cost of external funding increases sharply.
Such an external shock can lead to a protracted deterioration in the fiscal balance and the public debt burden. It may also lead us to reassess Australia’s contingent fiscal risks from its financial sector.