Positive rating momentum in emerging Asia stalling-Fitch

Fitch Ratings says positive rating momentum in emerging Asia has stalled amid slower improvement in sovereign balance sheets and, for some countries, concerns over high and rising leverage in the private sector.

In a recently published special report, Fitch says the region's two giants, China and India - are on negative outlook (for China, the local currency 'AA-' rating only). Korea's foreign currency rating of 'A+' is on Positive Outlook, alone in the region. The narrow balance of Negative Outlooks testifies to the stalling of upward rating momentum in the region, although this should be seen in the context of a run of positive actions in 2010-2011. The remaining eight emerging Asia sovereigns rated by Fitch are on stable outlook.

Fitch has cut its 2012 growth forecast for emerging Asia to 6.3% from 6.9% in 2011. Despite the lower forecast, emerging Asia is projected to remain the world's fastest-growing region. Part of the weakening reflects global pressures including a deteriorating outlook for the euro-zone. Emerging Asia's exports weakened in Q112 at a pace not seen since 2009, although the most recent data show some pick-up. However, there are also home-grown sources of weakness.

All three of the region's biggest economies - China, India and Korea - are showing the lagged effects of counter-inflationary policy tightening in 2010-2011. Emerging Asia is importing loose monetary conditions from the high-income economies, in particular the US, via more-or-less fixed exchange rates in many countries. Low real interest rates have spurred credit growth. Bank credit to the private sector is already back to 1997 levels relative to GDP for emerging Asia excluding China.

This is largely driven by India and Korea, while leverage remains below 1997 peaks in south-east Asia. Two large Asian economies, China and Indonesia, are assigned the highest-risk '3' score in Fitch's macro-prudential risk assessment framework on the pace of credit and asset-price growth. Elsewhere, the pace of growth of private sector leverage is a risk to varying degrees for the sovereign credit profiles of Philippines 'BB+', Thailand 'BBB', and Mongolia 'B+'.

The sole rating action among the five-strong club of high-income Asian sovereigns was Fitch's downgrade of Japan to 'A+'/Negative Outlook on May 22 on risks over the outlook for the country's public finances. Since the downgrade there is growing certainty that a law to allow Japan's consumption tax to be raised in 2014-15 will be passed. The tax hike would help to achieve the government's medium-term fiscal consolidation plan. However, Fitch notes the tax hike is back-dated and the agency believes there is still considerable political risk to the move.