Wednesday, September 21, 2011

Global uncertainties weigh on A-P sovereign credit quality, says S&P

KUALA LUMPUR: Risks associated with a'' weaker-than-expected global growth, sovereign debt concerns in Europe, and'' potential tightening in funding conditions weigh on Asia-Pacific's sovereign'' credit trends, said Standard & Poor's Ratings Services.

In a report entitled "Asia-Pacific Sovereigns: Is The Positive Rating Trend On Hold?' released on Wednesday, Sept 21, S&P said the weaker global conditions, combined with domestic inflation and specific weaknesses in some sovereigns, could slow the pace of upgrades for some Asia-Pacific sovereigns (Indonesia and Sri Lanka) and could result in negative rating actions for sovereigns with already weak balance sheets at their rating levels.

It said that Asia-Pacific sovereign ratings had bucked the global trend so far in 2011 with two upgrades (Indonesia and Fiji) to one downgrade (Japan).

But several sovereigns in the region faced a potential global recession with higher debt burdens and weaker budget positions than what they had in 2008, it said.

S&P's credit analyst Kim Eng Tan said that in some cases, the weaker balance sheets were due to the fiscal stimulus measures employed to offset the previous global slowdown.

"In others, it was due to the cost of natural disasters adding to fiscal pressures.

'In the Cook Islands, Japan, Malaysia, New Zealand, and Vietnam, net general government debt levels have risen significantly in the past few years partly for these reasons,' he said.

Aside from the growing risk of slower external demand, Asia-Pacific sovereigns were also facing inflation due to higher food and commodity prices, he said.

Meanwhile, another S&P analyst, Elena Okorotchenko said that central banks were now caught between the need to tighten monetary policy to head off an increase in inflationary expectations and the need to support the economy through lower interest rates. ''

She said international wholesale funding markets have started to show signs of strain, adding that the rising cost of interbank U.S. dollar borrowing was one indication.

If a serious liquidity squeeze recurs in the near future, it could affect Asia-Pacific sovereigns that depend on external funding or those with financial systems reliant on offshore markets, she said.

"Most sovereigns in the region, however, are in a strong position to meet the possible downturn.

'A number of governments have improved their balance sheets and strengthened their external positions during past periods of strong economic growth. Partly for this reason, we maintain a stable outlook on 16 of the 22 foreign currency long-term sovereign ratings in the region,' she said.

The report offers Standard & Poor's half-yearly outlook on 22 rated sovereign'' issuers in the Asia-Pacific region.


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