Despite the global uncertainty, Fitch Ratings has a stable outlook for much of the Asia Pacific for 2020, and even a few positives, according to Stephen Schwartz, Head of Sovereign Ratings for Asia Pacific at Fitch.
“Many economies in the region have good reserve buffers and can bear the fallout of international shocks,” he said, speaking at a Chamber roundtable on 22 January. “Many also have further room for monetary and fiscal stimulus.”
The event took place before the seriousness of the coronavirus was apparent and when few cases had been confirmed.
After a turbulent 2019, the credit ratings agency saw more stability ahead, due in part to the Phase One trade deal agreed between the United States and Mainland China.
“We expect 2020 to be a year in which global growth stabilizes. There was a sharp decline last year, but the good news is we see signs that this year will see growth bottoming out and maybe in some regions actually improving.”
Without having yet factored in the impact of the coronavirus, the agency saw global growth to be about the same overall in 2020 as it was in 2019. In Mainland China, Fitch also expected to see growth holding up pretty well – at 5.9% in 2020, then 5.8% in 2021. For the Asia Pacific, the outlook is generally positive. (Depending on the severity of the coronavirus, Fitch now sees Chinese growth for the year more likely in the 5.7-5.2% range.)
“In the region, very robust domestic demand, especially in some of the ASEAN economies, has been a support to growth. Many economies are benefitting from infrastructure drives, including the likes of Indonesia, the Philippines and Malaysia.”
Risks in the near term for the region include the social instability in Hong Kong, and tensions between India and Pakistan, and North and South Korea. Schwartz also mentioned the corona virus, which at the time of the roundtable was just emerging.
The Phase One trade deal has helped to improve the outlook. The pause in tariff increases means that the effective tariff rate is around 16%. This is compared to only 3% before the trade war started, but still better than the 25% that would have happened without the deal.
But Schwartz added that “we’re not out of the woods.” Although a truce has been reached on tariff increases, other issues remain.
“There are deep-seated tensions between China and the U.S. around technology, intellectual property and geopolitical interests, and we expect those to weigh on sentiment and the outlook.”
As part of the Phase One deal, China will significantly increase its purchases of U.S. services and goods. Questions have been raised about the feasibility of this commitment and its impact on other economies.
“It’s a very ambitious target – will China be able to deliver on these targets?” Schwartz said.
If China switches to the U.S. for more of its imports, this will affect its current trading partners, who may complain to the WTO, he added. And if the U.S. feels that China is not delivering on its side of the bargain, it could increase the tariffs again.
Another global factor is that low interest rates seem set to continue. Many economists expected the U.S. Federal Reserve to hike rates last year, but that didn’t happen, and Fitch expects the Fed to remain on pause in 2020. Global central banks generally followed the Fed’s lead on interest rates in 2019, and, as Schwartz said: “You have to look all the way back to the Global Financial Crisis to see such an aggressive period of monetary easing.”
This may mean that there will be a shift to more global fiscal easing in 2020, as the monetary arsenal runs dry.
“Central banks have got frustrated that all of the burden has been on them for supporting economic growth. And they’re running out of bullets now, with interest rates negative in Europe and Japan, and close to zero elsewhere. So they are leaning on ministries of finance to provide more fiscal support.”
Schwartz then looked in more depth at some of the Asia-Pacific economies. “It is a vast region, diverse, and covers pretty much the full credit spectrum,” he said. It includes AAA-rated countries like Australia as well as frontier markets such as Pakistan and Mongolia.
Despite the global uncertainty and weak export growth, most of Fitch’s sovereign outlooks for the region are stable, as a result of the economies’ financial buffers and space for policy stimulus.
“We only have a few on negative outlook - including Hong Kong. We downgraded Hong Kong last September because of the protests, and that issue hasn’t been resolved,” he said. Also with a negative outlook are Macao and Sri Lanka, which faces a challenging debt burden.
While most of the region is stable, there are two positive outliers when it comes to trade.
“Everybody knows Vietnam is benefiting from trade diversion, but this trend was already happening as manufacturers moved out of more expensive locations like Mainland China,” Schwartz said. “To me, the real surprise has been Taiwan. Taiwanese exports to the U.S. have surged.”
The reason for this is not clear yet, he said, but anecdotally, some of Taiwan’s export growth is as a result of trade diversion from the Mainland, and some from importers purchasing semiconductors directly from Taiwan. Another factor is that the government has been encouraging Taiwanese companies to return their manufacturing operations to Taiwan.
In terms of growth outlook, the top three performers for 2020 according to Fitch will be Vietnam, Bangladesh and the Philippines (which recently received a positive outlook from Fitch), with expected growth of 7.8%, 7.5% and 6.5%, respectively.
In terms of debt levels, the region is also in a good position.
“General government debt for most of the Asia-Pacific countries is at or below peer mediums. So this suggests to us there is room across the region for fiscal stimulus without deteriorating the credit outlook.”
There are few exceptions, including India and Malaysia. And at 230% of GDP, Japan’s public debt rate is the highest of all the economies that Fitch rates. But as a wealthy country with high domestic savings and negative interest rates, Japan can carry this burden.
Australia, South Korea and Hong Kong have high rates of household debt. Sooner or later these will need to normalize and could be a headwind to growth and consumption. Although China’s household debt has risen rapidly in the past decade, it is still low compared to OECD standards.
So although these are not a major concern in the short term, from a longer-term perspective, we need to worry about the build-up of debt in the region, Schwartz said.
The monthly PMIs for the region - the best leading indicator of turnarounds and growth, according to Schwartz - also indicate improving trends. This adds to the generally fair outlook across much of the Asia Pacific.
“We are gradually moving from what was a pessimistic outlook a few months ago to a more positive stance on the growth outlook for the region,” Schwartz said.