Prepare for flight of capital, Moody’s cautions Asia-Pacific

International bond credit ratings agency Moody’s cautioned emerging economies in the Asia-Pacific region, that despite possessing a high degree of immunity to external economic shocks, the US Federal Reserve interest rate raise will challenge their financial stability.

“A common challenge for emerging economies in the region will arise when the US Federal Reserve begins to raise interest rates. Nations in the Asia-Pacific region, like India, generally exhibit strong external payments positions and government debt profiles relative to their peers elsewhere in the world – factors that should stand them in good stead,”

This was articulated today, in Moody’s report titled “Sovereign Outlook – Asia Pacific: Credits diverge on domestic factors; resilience to external risks is high.”

In this it gave a positive rating outlook to four countries in the Asia-Pacific- India (Baa3), Korea (Aa3), Malaysia (A3) and Pakistan (Caa1), while Mongolia (B2) was given a negative outlook.

Moody’s said, that apart from these four countries, several other Asian Pacific countries are quite guarded against extreme external shocks, but most of them suffer from unrealized ambitious reforms and long standing challenges.“A key risk reduction move for improving credit quality is, therefore, whether governments can deliver on policy pledges,” it stated.

However it recognized that the recent slump in the price of oil has had a positive impact on the region’s import bill and by extension on the forex reserve.

The US Federal Reserve is expected to increase interest rates in the next few months, and that would result in a flight of capital from emerging economies, including India, the threat of which caused a balance of payment crisis for India in 2013.

Referring to China it said, the country’s slowing growth and slump in global aggregate demand would negatively impact trade performance in the Asia-Pacific region in the coming months, as well.

It also pointed out that household debt remained high in several countries in the region, but it did not pose much threat to financial system stability; however, this debt could dampen private consumption growth, which in turn would affect the growth prospects on the economy. Also, since many retail loans charged variable rates, consumers were exposed to rising global borrowing costs, which could increase pressure on household balance sheets.

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