Bangkok--27 Oct--Fitch Ratings
Link to Fitch Ratings' Report: Emerging Asia Vulnerability to Global Quantitative Easing: Sovereign Ratings Reflect Risk Factors
Emerging Asia's strong economic and sovereign-credit performance through the global financial crisis could come under pressure in the medium term from inappropriately loose monetary policy imported from advanced economies, Fitch Ratings says in a Special Report published today, with the ranking of exposures across the region indicating lower-rated sovereigns would be more at risk.
With at least nine of eleven Emerging Asian countries on some form of currency link to the USD, and the US Federal Reserve widely considered to be moving towards further quantitative easing (QE), Fitch argues countries with poorer track records of price stability, already-loose domestic monetary conditions and weaker financial systems would be more exposed to the risks of a further global monetary easing. On that basis, the report draws up a ranking of regional sovereign vulnerability based on ten selected indicators. Lower-rated sovereigns such as Mongolia ('B') and Vietnam ('B+') emerge at the riskier end of the range, while Taiwan ('A+') comes out as least vulnerable under both specifications considered.
Indonesia ('BB+') and China ('A+') look relatively more exposed than their rating levels would suggest, reflecting in Indonesia's case high and volatile inflation and shallow financial markets, and in China's case, exceptionally strong real credit growth implemented as part of economic policy stimulus since the onset of the global financial crisis. China's capital controls insulate it from global monetary conditions to some extent, allowing the PBoC to hike rates by 25bps in October in response to a pick-up in inflation. Enhanced capital controls are on the agenda in other countries including Thailand and Korea, indicating the pressure on policy frameworks, although controls carry costs of their own and Fitch does not expect them to play a significant role in addressing the risks discussed in the report.
The report offers a snapshot of Emerging Asian sovereign vulnerability to risks associated with further QE, and the simple framework adopted cannot substitute for Fitch's country-level sovereign credit analysis. For example, important risk mitigants such as sovereign balance sheet strengthening arising from ongoing official reserve accumulation are not considered. Overall, the strong relationship between the rankings and the order of sovereign ratings in the region suggests limited likely rating impact from this area of risk, although Fitch's Asia-Pacific Sovereigns team will continue to monitor developments closely.