Moody's: Currency flexibility, policy vigilance supports credit quality of Asian sovereigns

Moody's Investors Service says that exchange rate flexibility, fiscal and monetary policy vigilance and efforts to revive domestic sources of growth will support the sovereign credit profiles of several Asian sovereigns during a period of heightened external pressures.

The report covers India (Baa3 positive), Indonesia (Baa3 stable), Malaysia (A3 positive), the Philippines (Baa2 stable), Singapore (Aaa stable) and Thailand (Baa1 stable), all of which experienced varying degrees of pressure on their respective currencies in 2015. According to Moody's, these pressures may persist in 2016, as China's (Aa3 stable) slowdown curbs export growth and monetary policy tightening by the US (Aaa stable) Federal Reserve weakens net capital inflows.

Against this backdrop, Moody's maintains stable or positive rating outlooks on the six sovereigns. The report highlights that the causes of depreciation -- slower global growth and heightened risk aversion -- are credit negative. Moreover, a credit negative consequence of depreciation is the higher cost imposed on importers and foreign borrowers located in these countries. On the other hand, by allowing their currencies to adjust to trade and investment trends rather than expending reserves to defend an exchange rate higher than suggested by economic fundamentals, authorities have averted the kind of balance of payments shock witnessed during the 1997/98 Asian financial crisis. Just as important in supporting sovereign credit profiles, in Moody's view, is that authorities have focused on reviving domestic growth while remaining vigilant around fiscal and inflation targets.

Acknowledging that reserves and current account positions have improved significantly since the late nineties, Moody's points out that a benign global environment over the last decade and a half has benefited growth and the balance of payments in the sovereigns covered. As external conditions are now more challenging, Moody's expects respective authorities to focus on reviving domestic growth. However, the desire to sustain investor confidence amid a less certain global environment will keep governments from unleashing stimulus that would raise macroeconomic imbalances.

Although investors may have largely discounted US monetary tightening and slower growth in China, the six Asian sovereigns covered in the report are still likely to see capital account pressures whenever unfavorable data are released or even when anticipated global events -- such as a rate hike by the US Fed -- occur.

Nonetheless, Moody's expects that domestic factors will be the key determinants of the broad direction of capital flows into and out of these Asian countries in coming months-- in particular, whether their respective policies appear likely to revive growth, without weakening their fiscal, inflation and current account positions.

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