Fitch: US Tightening, Trade Risks Weigh on APAC Growth Outlook

Most APAC economies have started 2017 with good momentum, and regional growth is likely to remain relatively healthy by global standards during the rest of the year, says Fitch Ratings. APAC sovereign rating trends are mostly stable. However, several rising challenges are likely to weigh on growth as the year wears on. Tighter global financial conditions and another round of US dollar appreciation could create strains. China's economy is likely to ease, which would dampen external demand around the rest of the region. A potential increase in global protectionism might also undermine export performance, while geopolitical risks - such as those centering on North Korea - could dampen business sentiment.

Asian exports and business surveys have fared better than we had expected, reflecting surprisingly strong growth in the US and Europe as well as policy-driven stabilisation of growth in China. Expansionary fiscal policy and infrastructure spending have supported domestic demand around much of the region, and some economies are making progress on reforms, most notably India and Indonesia.

 

However, tighter global financial conditions could see growth decelerate over the next few quarters. We forecast two more US rate hikes in 2017, and another four in 2018. Eventually, we expect the Fed Funds rate to normalise at 3.5%-4.0% by 2020, far higher than current market expectations. Higher US rates are likely to drive renewed appreciation of the US dollar.

Higher debt-servicing costs in Asia might create pressures in countries where debt has built up rapidly during the period of very low interest rates. Some sovereigns are made vulnerable in this respect by high private foreign-currency debt, such as in Malaysia, or a dependence on foreign inflows - such as in Indonesia. Asset prices could also suffer.

A stronger dollar could have benefits for Asian exporters, but this is offset by the prospect of a slowdown in China and the risk of increased protectionism. The Chinese authorities have recently started to shift their focus toward curbing leverage and containing financial risks. Macro-prudential controls on banks' shadow-funding activities have been tightened in recent months, and the People's Bank of China has increased key money-market interest rates. These measures are likely to slow growth in 2H17 and into 2018.

The main protectionism threat stems from the US. A recent meeting between US President Trump and Chinese President Xi appears to have lowered the risk of an imminent trade war between their countries, but a lot could still change. The Trump administration has already withdrawn from the Trans-Pacific Partnership, and has consistently used tough rhetoric on trade, with the emphasis on "unfair" competition from countries that run large bilateral trade surpluses with the US, including China. The US vice-president has also said this week that the trade pact with South Korea will be reformed.

Overall, we expect APAC aggregate GDP growth to remain relatively flat in 2017. Slowdowns are likely in some of the most trade-dependent economies with significant exposure to China, such as Hong Kong, Korea, and Singapore. However, we expect marked pick-ups in the next few years in the domestically driven economies of India and Indonesia, which should continue to benefit from recent reforms.

Most APAC sovereigns are on Stable Outlook, with some exceptions. Indonesia and the Philippines are on Positive Outlook, reflecting strong GDP growth and - in Indonesia's case - positive reforms and growing resilience to external pressures. Japan's 'A' rating was placed on Negative Outlook last June on deteriorating public finances, although recent indicators point to a brighter growth outlook than we had previously expected.

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