Fitch Rating says most APAC sovereigns are on Stable Outlook with only Vietnam on Positive and two on Negative – Bangladesh and the Maldives. It said APAC growth has remained resilient in 2023, despite the weaker than-anticipated Chinese rebound and tighter external financing conditions. Inflation has fallen to more comfortable levels in many places, although El Niño is a risk, particularly for sovereigns that have food as a large weight in the CPI, such as India, the Philippines and Thailand. This could lead to larger subsidy bills and delays in monetary easing if central banks expect second-round effects.
However, FDI inflows into China have fallen sharply over recent quarters, which could be related to shifts in supply chains, but also cyclical factors as firms may be postponing investments amid subdued and uncertain global growth prospects. FDI inflows have picked up in Singapore and Malaysia, including the electronics sector, while the rise in India is mostly geared towards services.
Slow Progress on Fiscal Consolidation
Fiscal deficit reduction has been relatively modest in most places this year, despite resilient growth, as governments balance their consolidation goals with economic growth aims. Consolidation in sovereigns that had the widest deficits in 2022 tends to be small relative to the broader regional trend. Limited fiscal headroom could leave some credit profiles vulnerable to future shocks. Fitch Ratings forecasts a rise in government debt/GDP in 2023 for around half of APAC sovereigns and an increase in 2023- 2025 for 40%. Debt/GDP will be higher in 2025 than 2019 for around 80% of our rated sovereigns.
Lingering External Pressure for APAC Frontier Markets
APAC sovereigns’ foreign-reserve dynamics have diverged in recent quarters. Some central banks have accumulated reserves on current account improvements or investment inflows, while others have currencies that remain under pressure from a strong US dollar and tight Fed policy.
Fitch says it expects external financing challenges to continue for frontier markets, especially where reserve coverage ratios are low and external liquidity positions fragile. This is reflected in the Negative Outlooks for Bangladesh and the Maldives, and ratings in the ‘CCC’ category or below for Pakistan and Sri Lanka. Mongolia and Vietnam, on the other hand, may face less external pressure, given the pick-up in Mongolia’s exports and Vietnam’s recent stabilisation of reserves
