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Asia Growth Stable Amid Global Trends

21 September 2007: Fitch Ratings said economic growth in Emerging Asia is forecast to come in at 8.7% this year, from 8.6% in 2006, but cautions that the outlook is likely to deteriorate as capital flows to Asia and current account surpluses in the region decline.

James McCormack, Senior Director and Head of Asia Sovereigns, speaking at Fitch's Sovereign Hotspots conference in Tokyo, spoke about the extent to which emerging Asian economies are exposed to either a global economic slowdown or a sharp reduction in international investors' risk appetite. He concluded that Asia is well placed to deal with credit market adjustments given the large stock of foreign exchange reserves, strong balance of payments positions and more flexible exchange rate regimes. "The largest and fastest growing Emerging Markets in Asia - China and India - tend to rely more on domestic than external demand for growth. While these considerations may provide some comfort to Asian policymakers, Asia still remains vulnerable to slowdowns in global economic growth. Much of the investment in China, for example, is directed at the export sector, and India's domestic growth is financed to some extent by international capital flows," explained Mr. McCormack.

Meanwhile, Ai Ling Ngiam, Director in the Sovereign team, said that the Indonesian government's priorities on investment, exports and employment set the economy on a sound macroeconomic framework, while in the near term, prudent monetary policy will be key to managing potential stresses arising from the financial markets. Fitch currently rates Indonesia at 'BB-' (BB minus). Touching on South Korea, she noted that while public and external finance resilience are supportive of the ratings ('A+'/Stable), increasing short term external debt and the growing government debt burden warrant monitoring. Meanwhile, Malaysia's 'A-' (A minus) sovereign rating remains constrained by the high ratio of public debt to GDP and weak non-oil revenue buoyancy. Malaysia's bumper oil revenue and high capital spending by the government, and via non-financial public enterprises, delay the structural reform process towards stronger fiscal consolidation.

Vincent Ho, Associate Director with the Sovereign group, highlighted rating strengths and weaknesses as well as current issues facing Hong Kong, Taiwan and Thailand. A number of factors, including demonstrated autonomy on economic and financial policies, a credible linked exchange rate system, strengthening external financial position and improving public finances, supported Fitch's upgrade of Hong Kong's Long-term foreign currency Issuer Default Rating (IDR) to 'AA' from 'AA-' (AA minus) in July 2007. "Along with the launching of different CNY-related financial services, the territory's role as an international financial centre has become more diversified and unique in the region," said Mr. Ho.

Despite its solid external financial position, Taiwan's sovereign ratings are constrained by cross-Strait relations and weaknesses in public finances and the banking sector. "The presidential election is due to be held in March 2008, which may be critical to Taiwan's economic development in the medium term," said Mr. Ho. Thailand has been affected by domestic political uncertainty since late 2005, which has been a major rating concern. "However, the current interim government's commitment towards holding general elections by end-2007 looks promising, and could be a major step towards restoring political normalcy in Thailand," said Mr. Ho.

On the US economy and the ongoing credit crunch, David Riley, Group Managing Director of the Sovereign Group, notes that fears of a US recession have risen over the past year amid the slump in the housing market - which is suffering through its worst slump in 16 years. On the global economy, Mr. Riley expects the US slowdown to be offset to some degree by the strength of recoveries in Europe and Japan, coupled with continued strong growth in the Emerging Markets.

(This is press release of Fitch Ratings)

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