Asia-Pacific (APAC) economic momentum should turn positive in 2H20 as domestic lockdowns are eased and external demand gradually improves, limiting the drop in regional economic output to 1.7% in full-year 2020, says Fitch Ratings. Despite this, a number of APAC sovereigns will continue to face negative rating pressures amid the shock from the coronavirus pandemic, particularly from deteriorating public finances and, in some cases, external financing risks. The majority of the region’s sovereign credits are on Stable Outlook. However, this follows a number of negative rating actions this year, including downgrades on Hong Kong, the Maldives, and Sri Lanka, and the removal of Positive Outlooks on the Philippines, Thailand, and Vietnam. The pandemic was a factor in all of these rating actions. Negative Outlooks are in place on the ratings of six sovereigns in the region. Half of these are frontier markets that face external refinancing risks (Laos, Maldives and Sri Lanka), while the remainder are coping with high and rising public debt ratios or, in the case of Macao, downward credit pressures from declining gaming revenues. Some sovereigns in APAC, such as Indonesia, Korea and New Zealand, entered the crisis with policy space to counter an unexpected downturn through fiscal easing without putting pressure on their ratings. For others, widening fiscal deficits and rising public debt ratios present negative rating pressure. In countries in which general government debt-to-GDP ratios are already above the respective peer medians, we expect a further jump in their ratios in 2020, such as in Australia, India, Japan and Malaysia. More generally, when governments fail to present credible medium-term strategies for stabilising or reversing the recent rise in debt-to-GDP levels after the crisis subsides, this could strain ratings. Although fiscal policy responses will in some cases add to downside rating pressures, they will also contribute to an acceleration of regional growth momentum in 2H20. Relief measures to cushion the impact of the crisis on households and businesses through transfers, lending programmes and schemes to encourage employee retention will support the recovery in demand when governments are able to scale back measures designed to contain the pandemic. The APAC region as a whole is set to outperform the global economy. The contraction we forecast for APAC in 2020 represents a relatively strong outcome compared with the 4.6% contraction in the global economy that we expect in 2020. “The outperformance will be led by China, which we expect to post quarterly growth in 2Q20 and a full-year expansion of 0.7%. Though weak by historical standards, this will represent a stronger outturn than that in most other large economies, both emerging and developed. It also places China among only four Fitch-rated sovereigns in APAC that we still expect to record growth in 2020, rather than contraction,” Fitch said. As activity normalises, we project regional growth to rebound strongly in 2021 from the troughs in 2020. However, the outlook for APAC remains subject to a high degree of uncertainty, and will be influenced by the unpredictable evolution of the global pandemic and its impact on consumer and business sentiment. Although growth momentum is set to strengthen, domestic spending in much of APAC will remain below the levels of 2019 for some time to come. In the near term, declining exports will also hinder growth in many Asian economies. Several countries in the region, such as the Maldives, Sri Lanka, Vietnam and Thailand, are highly reliant on tourism receipts, while others, such as Bangladesh and the Philippines, are dependent on remittances. These will take longer to recover.
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