Asia Q1 results: China’s economic slowdown hangs over Asia’s A-rated sovereigns


Matthew Turner
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The slowing of China’s growth miracle in Q1 2013, coupled with concerns over leadership transitions and credit-fuelled growth, had a negative impact on country risk scores for Asia’s top-tier sovereigns in Q1 2013.

Five of Asia’s A-rated sovereigns became riskier in Q1 2013, according to the results of Euromoney’s Country Risk Survey. Moderate deterioration in China’s risks appears to have had a negative impact for Hong Kong, Singapore and South Korea, while election jitters in Malaysia saw the sovereign losing ground to Macau in the global rankings.

In a reversal of fortune, southeast Asia’s rapidly expanding markets benefited from robust economic growth and reform momentum, with Vietnam, Thailand and the Philippines all seeing an improved risk outlook in Q1.

Although Malaysia remains one of the region’s safest economies, pre-election uncertainty posed downside risks to the country’s credit outlook in Q1. Analysts participating in the survey downgraded the sovereign by 2.0 points to 61.8 – the largest decline in the region – meaning the sovereign slipped to 35 globally.

China continued to slide in the latest results of the survey, as country experts become more alarmed about the sustainability of the country’s economic growth trajectory and credit-fuelled boom. Worsening access to capital markets and bank finance had a negative bearing on the world’s second-largest economy, which left the sovereign falling two places to 41.


China’s Q1 growth figures released on April 15 showed real GDP growth slowing to 7.7 % year-on-year in Q1 2013 from 7.9% in Q4 2012, which was below the consensus forecasts of 8% growth. The figures negatively affected equity markets and contributed to the steep fall in gold prices earlier this week.

Maritza Cabezas, senior economist at ABN Amro, traces China’s weaker-than-expected growth figures to the rise emanating from the country’s banking sector and the rebalancing of the economy, after the inauguration of president Xi Jinping as party chairman in March.

“The rebalancing strategy in favour of consumption will result in slower GDP growth rates than what we have been accustomed to,” says Cabezas. “There are some downside risks to the outlook, including the surge of shadow banking and excessive leverage of local governments.”

Hong Kong’s score decline left it losing ground to Australia and Canada in the global rankings, after falling three places. With a global rank of 11, economists might be beginning to question the country’s AAA rating.

Of most concern to ECR economists this quarter was the country’s monetary policy and currency stability indicator, which deteriorated by 0.4 points to 7.1, reflecting inflationary concerns and overheating in some sectors.

As a report by HSBC (Macro economics – Asia Q2 2013) notes: “As loose liquidity conditions continue to fuel asset price growth, we believe the biggest challenge for policymakers [in Hong Kong] will be to strike a balance between growth and inflation concerns.”

South Korea became riskier mainly due to transparency issues and a worsening policy environment, leaving the sovereign falling two places to 32nd. Korea’s heightened risk perception follows the election of New Frontier Party candidate Park Geun-hye as president in December.

Analysts have downplayed the impact of geopolitical sensitivities emanating from Pyongyang on South Korea’s credit outlook. Moody’s notes: “Pyongyang’s bellicose rhetoric highlights geopolitical risks, but does not undermine South Korea’s credit fundamentals.”

However, looking ahead, analysts expect policy gridlock to stabilize in Q2, as the government works towards implementing a supplementary budget and resolving tensions with the opposition. Nevertheless, currency pressures will persist when the full scale of Japan’s monetary-easing programme channels into Korean export figures.

Southeast Asia’s larger economies appear to have benefited from a reverse of fortunes this quarter, with Vietnam, Thailand and the Philippines all seeing improving risk scores in Q1. However, Indonesia has moved in the opposite direction, with overheating concerns continuing to negatively affect the country’s risk outlook.

ECR analysts downgraded Indonesia’s ECR score by 0.5 points this quarter, leaving the sovereign falling two places in the rankings. The sovereign’s increased risk perception was underpinned by increased concerns in the rupiah’s stability and the deterioration in the country’s current accounts, which have in turn raised doubts about the sustainability of the country’s growth path.

Taiwan was the only A-rated Asian sovereign to become safer in Q1 2013, with participating economists upgrading the country’s ECR score by 1.2 points to 74.9. Ranked 17 globally, Taiwan remains Asia’s third-safest investment destination, behind Singapore and Hong Kong.

Improved relations with China appear to have spurred investor confidence in Taiwan, with trade and investment linkages continuing to expand with mutual benefits for both sides, according to analysts.

Taiwan’s strong performance in the survey this quarter was underpinned by resilient economic performance and spending restraint, which has helped stabilize public finances.

This artice was originally published by Euromoney Country Risk. To discover more, resister for a free trial at Euromoney Country Risk.