As the market participants look forward to hearing Governor Das later this morning, it is pertinent to take note of a recent report by Moody’s Investors Service, cautioning about strengthening headwinds, tight funding conditions, and rising geopolitical threats for Asia Pacific region.
The report emphasizes that “A downshift in China's economic growth rate and a cyclical slowdown in the US will weigh on Asia-Pacific (APAC)'s credit conditions in 2024. Peaking inflation globally will provide space for monetary tightening cycles to slow, but financial conditions will remain difficult for the weakest rated issuers. Meanwhile, geopolitical risks will continue to shape business decisions.”
Interest rates: Moody’s does not expect central banks in the region to hike rates further. However, it believes that interest rates will remain elevated and decline only gradually. The possibility of occasional rate increases to guard against unexpected inflationary pressures is also not ruled out. Given that policy rates will remain above levels seen in the last decade, this will increase borrowing costs and hamper growth. Refinancing and liquidity risks will be highest for frontier markets and high-yield issuers.
Growth: Moody’s projects the weighted average of real GDP growth for the 25 sovereigns in APAC to decelerate to 3.6% in 2024 from 4.4% in 2023, reflecting the slowdown in China and broadly lackluster global economic conditions, including the cyclical slowdown in the US.
Though APAC growth may continue to outperform that of most other regions. The slowdown in China is expected to be mitigated by robust domestic demand in large emerging markets, such as Indonesia and India.
Geopolitics: It is expected that geopolitics will remain a primary concern in 2024. Competition over trade and technology between China and the US; and escalation of military conflicts in the Middle East continue to pose risk. However, it could be an opportunity only for economies with strong manufacturing bases and good infrastructure, such as Vietnam, Thailand, and Malaysia.
Credit outlook: The share of stable outlooks in APAC across sectors has declined from last year, reflecting a weaker economic backdrop. Nonfinancial companies and financial institutions in China will continue to face difficult credit conditions in 2024. This contrasts with a stable outlook for nonfinancial companies and financial institutions in the rest of APAC. Refinancing risks will remain elevated for nonfinancial companies reliant on the high-yield market.
Outlook for sovereigns negative: In addition to risks from slower growth for the region, still tight funding conditions are likely to weigh on the ability of governments to achieve deficit consolidation and debt reduction. Larger debt burdens with higher interest rates have also led to a significant deterioration in debt affordability.
Slowing policy rate tightening in the US could alleviate some currency pressures for both higher-rated and lower-rated sovereigns. Currency weakness in APAC has been pronounced amid the US dollar’s broad strength since 2022. A stabilization in bilateral exchange rates with the US could bring some relief to holders of foreign currency debt.
The short point is that regardless of what Governor Das says today, conditions warrant investors to exercise some extra caution and not indulge in any misadventure with their hard earned money.
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