Apr 06, 2022 (MLN): Direct trade ties with Russia or Ukraine are restricted for most Asia-Pacific (APAC) sovereigns. However, dependence on energy and, in some cases, food imports means that higher prices will generally be a headwind for APAC sovereigns, increasing subsidies and current account imbalances across the region, while boosting the few commodity exporters. , the latest Fitch Rating report said.
APAC would experience a medium impact assessment in a potentially adverse macroeconomic scenario of stagflation amid sharply diminished growth, the surge in global oil prices, continued higher inflation and interest rates. The rating impact may involve numerous changes in the outlook, some rating guards and some potential rating changes, the report said.
Many APAC government bonds have relatively strong external buffers, but tighter global financing conditions and higher oil prices would increase external financing risks for low-rated frontier market governments.
APAC Treasuries have mostly maintained relatively low inflation and interest rates, but faster US monetary tightening in the adverse scenario and increased domestic inflationary pressures would likely narrow the scope for accommodative monetary policy.
Fiscal consolidation may also become more challenging due to slower growth in the region’s main trading partners, tighter monetary policy and higher subsidy costs. The adverse scenario could pose challenges to stabilize and reduce debt due to high post-pandemic levels.
Sovereign credit profiles in South Asia may be more at risk in the adverse scenario, given their limited fiscal space and potentially larger current account deficits, and in some cases weak currency reserve buffers.
While North Asian sovereigns can be more resilient. The region’s export-oriented economies would be hit by reduced global demand for manufactured goods and the shock from energy prices, but overall stronger sovereign balance sheets would make government bonds in Northern Asia, including Greater China, more resilient.
Fitch believes that China (A+/Stable) would take some counter-cyclical policy measures in the adverse scenario and assumes that potential tensions between the US and China due to Russia’s invasion of Ukraine will not rise so high as to affect Chinese exports. or materially disrupt growth.
The leeway and buffers between ASEAN countries are mixed and generally stronger than those in South Asia, but offer less buffer against shocks compared to states in North Asia.
The report highlighted that the divergence between energy importers and exporters in the adverse scenario is most pronounced in the Middle East and North Africa (MENA) due to the size of the subsidies. The region would have a mild to moderate impact, meaning there would be very little potential change and some prospects.
Direct trade and financial channels between Latin America and Russia and Ukraine are narrow and exposure to geopolitical risks from the war is also low. As producers and exporters of commodities (fuel, metals and agricultural products), some countries would clearly benefit from higher prices. However, this may be partially offset by slower growth in the US and China, which is putting pressure on foreign demand.
In addition, capacity constraints, a lack of positive investment momentum in the commodities sector and underlying political uncertainties in some oil and metal producing countries could
the advantage of higher raw material prices. Higher inflation and monetary tightening would also weigh on domestic demand.
Energy rationing in Europe is an important part of our adverse scenario and would represent a significant economic shock along with higher fuel prices. Reliance on Russian energy imports varies considerably across the region. However, non-energy trade and financial ties are generally small, and some of the region’s highest-rated government bonds have significant room to absorb shocks.
According to the report, North America is least affected under the adverse scenario. As a commodity exporter, Canada (AA+/Stable) is benefiting from higher oil and grain prices. It has a large, diversified domestic market, which should absorb external shocks, although its economy is also prone to rapidly rising interest rates, especially given the long-term build-up of private sector debt and the bloated housing market. Canada’s one-step downgrade during the pandemic would also provide some room for the rating to absorb the mild economic impact of higher interest rates.
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Posted on: 2022-04-06T11:30:48+05:00
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