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  3. Asia Pacific economies to face challenges when the US begins raising rates: Moody’s

Asia Pacific economies to face challenges when the US begins raising rates: Moody’s

24 Apr 2015 Evaluate

Global rating agency Moody's has cautioned that though emerging economies in Asia Pacific (APAC)  region, including India, have a high degree of immunity to external shocks, but will face challenges when the US Federal Reserve begins raising interest rates. It further added that Commodity exporters in the region will be most adversely affected by China's 'new normal' of slower economic growth.

Moody’s which is having a ‘Baa3’ rating for India, with a positive outlook, said that most APAC sovereigns have a relatively high degree of immunity to external economic shocks but their ratings momentum is diverging as some drive through ambitious reforms, while others struggle with long-standing challenges. Hence, a key risk for credit quality is therefore, whether, governments can deliver on policy pledges.

The US Federal Reserve is widely expected to increase interest rates by June or September, a move that would result in a flight of capital from emerging markets, including India. Moody's said as most sovereigns in Asia Pacific are net oil importers, the recent slump in oil prices will have a largely positive impact on the region. Moody's noted that savings on energy costs will support sovereigns in their efforts to rein in budget deficits or rebuild fiscal buffers.

The rating agency also said that household debt remains elevated in several economies around the region, but that does not pose imminent or significant risk to financial system stability. However, such debt will dampen private consumption growth, which could constrain economic expansion. But it said that since a significant proportion of retail loans charge variable rates, consumers are directly exposed to rising global borrowing costs, which could amplify pressures on household balance sheets.

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