Asia scores fall amid EM bond and equity sell-off

By:
Matthew Turner
Published on:

Economists saw rising levels of country risk among Asian sovereigns in June as investors fled emerging market debt and equity markets, after the US Federal Reserve announced it will unwind its policy of quantitative easing (QE).

Scores for Asian sovereigns covered by Euromoney’s Country Risk Survey mainly declined as most economic outlooks deteriorated and markets dramatically sold off – with tighter monetary conditions in China also affecting risk levels for the region as a whole. 

However, Malaysia appears to have bucked the regional trend, with economists seeing reduced country risk after the country’s presidential elections in May. South Korea and the Philippines also escaped a downward shift to their risk assessments.

Contributing experts lowered their economic scores for six Asian countries, with downgrades most pronounced in China, Thailand and Taiwan.

Meanwhile, Asia’s A-rated sovereigns suffered from further downgrades this quarter, as loose liquidity conditions fuelled asset-price growth.

Thailand’s ECR score fell by 0.6 points as analysts become concerned about rapid capital inflows, which have put upward pressure on the Thai baht.

Asia’s increased risk perception this month is underpinned by bank stability concerns, lower economic outlook scores and monetary policy tightening across several countries in the region.

With question marks being raised over the sustainability of Asia’s credit-fuelled boom, investors will need to remain vigilant about bank stability across the region.

China’s bank stability score of 5.6 points is the sovereign’s biggest economic problem, according to ECR data, after slipping 0.1 points in June. 

This means China’s banking sector score is 1.1 points below the east Asian average, reflecting the unresolved core risks on Chinese banks’ loan books. Indeed, CDS spreads have increased on some of China’s main banking corporations during the past month (see chart below).

The systemic risks stemming from China’s banking sector could do enough harm to off-set the great strides several Asian economies have made in recent years in boosting economic growth and employment. 

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.