US tariffs are hitting exports from China and the rest of the Asia-Pacific (APAC), but Fitch Ratings forecasts growth to remain higher than in other regions. US dollar weakness and the ability of some central banks to cut policy rates will mitigate the impact of weaker global demand, but the headwinds are already affecting the fiscal consolidation efforts of several governments.
Policy responses to the weaker global demand and uncertainty will be key towards easing the impact of the headwinds on sovereign credit profiles. Some governments are raising spending to support households to alleviate the high cost of living, even though inflation is largely subdued in APAC, often signalling weak domestic activity. We think that recent violent protests in some countries, such as Nepal, Indonesia and the Philippines, could add to spending pressure.
Deep domestic capital markets help the financing of fiscal deficits in some countries, but many have reduced fiscal headroom. Fiscal consolidation has been modest generally after debt levels increased significantly during the Covid-19 pandemic.
Most APAC sovereigns are on Stable Outlook with the exception of the Negative Outlook for Thailand, reflecting increasing risks to its public finance outlook from prolonged political uncertainty as well as growth headwinds from slowing global demand, a delayed tourism recovery and household deleveraging.
So far this year, we upgraded Pakistan to ‘B-’ from ‘CCC+’ and Uzbekistan to ‘BB’ from ‘BB-’, reflecting progress in reform implementation in both countries, as well as Pakistan’s support of its IMF programme performance and funding availability. We downgraded China to ‘A’ from ‘A+’ in April, reflecting our expectation of a continued weakening in its public finances and a rapidly rising public debt trajectory during the country’s economic transition.
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