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Moody’s negative on Asia’s sovereign creditworthiness

by SuperiorInvest

Moody’s Investors Service has a negative outlook for sovereign creditworthiness in Asia-Pacific this year, due to China’s slower economic growth, as well as financing shortages and geopolitical risks.

China’s recovery from the Covid-19 pandemic was not as rapid as several economists expected in early 2023. The country’s GDP during the last three months of 2023 increased by 5.2%, according to the National Bureau of Statistics, missing estimates of 5.3% in a Reuters poll.

In a Jan. 15 report, Moody’s predicted China’s real GDP growth would slow to 4% this year and next, from an average of 6% between 2014 and 2023. The credit rating agency said the slowdown in China’s growth “significantly influences” APAC economies. due to its strong integration into global supply chains.

Goldman Sachs and Morgan Stanley, among other major international investment banks, predict that China’s economy will grow at a slower pace of 4.6% in 2024, compared to the 5.2% expected for 2023.

Adjusted financing

In addition to the “lackluster situation in China,” tight financing conditions will also affect Asia-Pacific sovereigns, Christian De Guzman, senior vice president at Moody’s Investors Service, told CNBC.

“This is also based on global liquidity conditions, where we really don’t see the Federal Reserve easing its monetary policy until mid-year,” Guzmán said on CNBC’s “Squawk Box Asia” program on Monday.

“And Asia-Pacific central banks: we don’t see much decoupling [from] global liquidity conditions there.”

In December, the Federal Reserve voted to keep interest rates at their highest level in 22 years, but expects three cuts to come in 2024 as inflation eases.

Moody’s report said high interest rates will prevent material gains in debt affordability, although rates are expected to decline gradually. As a result, international financing will remain difficult for lower-rated sovereigns, he concluded.

Geopolitical risks

Guzmán also said that strategic tensions between China and the United States will persist.

China is an important trading partner for most Asian nations, while the United States also remains an important economic partner. As the gap between China and the United States widens, it may become increasingly difficult to maintain this balancing act, according to a 2018 World Economic Forum report.

That could also mean opportunities for countries with large manufacturing bases and infrastructure improvements, such as India, Malaysia, Thailand and Vietnam, as companies diversify their supply chains away from China to mitigate geopolitical risks, the Moody’s report wrote.

Stronger overall growth driven by domestic demand and regional trade amid easier financial conditions could upgrade the region’s outlook to stable, Moody’s said.

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