Bangkok--13 Dec--Fitch Ratings
Fitch Ratings-Hong Kong/Singapore-13 December 2006: Fitch Ratings says that slower global economic growth in 2007 will cause current account positions across much of Emerging Asia to deteriorate, contributing to smaller accumulations of official foreign exchange reserves.
"For the region, Fitch forecasts a reserve build of USD300 billion next year, which would be slightly lower than 2006, but still enough to improve net debt positions and support sovereign creditworthiness," said James McCormack, head of Asia Sovereigns.
In a Special Report entitled "Asia Sovereign 2007 Outlook" to be released today, Fitch identified three issues it expects to be in focus in its Emerging Asian sovereign credit assessments next year. The agency suggested that regional credit considerations will include the effects of a slowdown in US GDP growth, an anticipated reduction in the rate at which official foreign exchange reserves are accumulated and potentially heightened political risks in several countries.
Fitch said weaker growth in the US will eventually affect Asian export earnings, despite several countries posting strong growth into the fourth quarter. Those countries most directly exposed to a slowdown in the US as measured by US-bound exports relative to GDP are Hong Kong, Singapore and Malaysia. "Not surprisingly, the most open economies appear the most vulnerable to a shift in external demand," said Mr. McCormack. Fitch noted that the value added in exports tends to be lower in these countries, thus alleviating the effect on GDP growth. Policymakers across the region may enact modest fiscal or monetary easing to offset an export slowdown, though Fitch does not anticipate any resulting rating implications.
With less favourable growth prospects for Emerging Asia, capital inflows are forecast to decline in 2007. In addition, Fitch believes the Chinese authorities will allow for a slightly quicker appreciation of the renminbi next year. "The weaker balance of payments positions could alleviate upward pressure on Asian currencies, and some central banks may follow China's lead, resulting in appreciations along with less intervention in foreign exchange markets," said Mr. McCormack. The agency indicated that a sharper than expected broad decline of the US dollar would renew upward pressure on Asian exchange rates, and central banks may again resort to intervention, adding more to official foreign exchange reserve holdings.
Political and security issues will be in focus across in a number of Asian countries in 2007, including the Philippines, Thailand, Korea and Sri Lanka. Congressional elections are scheduled for March in the Philippines, while the contentious - and potentially disruptive - issue of constitutional change continues to dominate the political agenda. In Thailand, ongoing support for the Council for National Security will depend in part on whether it honours its commitment to restore democracy by late next year. Fitch believes considerable political manoeuvring will take place in the lead-up to elections, as the Thai Rak Thai party that controlled the legislature under the former prime minister is unlikely to be an effective political force. The expected resumption of Six-party talks would be the first positive development with respect to North Korea's nuclear programme in some time. Fitch is doubtful much will be accomplished in the short term, but shifting the issue from the UN back to the Six-party forum reduces risk by offering an opportunity for negotiation. A return to peace is proving elusive in Sri Lanka, and there is a material risk that the conflict between the government and the Liberation Tigers of Tamil Eelam escalates toward all-out civil war.
Fitch's "Asia Sovereign 2007 Outlook" report will be available shortly on www.fitchratings.com
Contact: James McCormack, Hong Kong, +852 2263 9925, [email protected]
Media Relations: Ching-Yuen Lock, Singapore, Tel: +65 6238 7301; Sylvia McKaige, Singapore, Tel: +65 6336 0095.