Asia Pacific emerging market credit conditions broadly stable in 2019: Moody’s

• Cautions trade tensions and tighter liquidity pose risks

Credit conditions for emerging markets in 2019 will probably be more challenging as global growth slows, financial market volatility continues, interest rates rise and trade protectionism and geopolitical tensions heighten, says Moody’s Investors Service in a new report.

However, Moody’s has a broadly stable outlook on emerging markets, including in Asia. The outlook

incorporates the various buffers that emerging market debt issuers have against these challenges, such as strong balance sheets, supportive policy and access to a growing domestic market.

“As global trade slows and financing conditions tighten in 2019, we expect median GDP growth in emerging economies in Asia Pacific to slow to 4.8%, following an expected 5.8% growth rate in 2018,” says Moody’s Managing Director Atsi Sheth. 

“This is still a robust growth rate, supported by domestic drivers such as rising household incomes, a growing middle class, expanding working-age populations and infrastructure investment.”

However, escalating trade tensions between China and the US will pose risks through trade as well as investment flows. For instance, if trade measures lead to a reevaluation of supply chains across the region, some issuers could face higher costs or lower growth, or both. In this scenario, trade-reliant economies in the region including Malaysia, Thailand and Vietnam would face a material and longer period of slower growth.

The potential to shift export production away from China to some of these economies could mitigate the negative impact.

The risk also remains that stress in other emerging markets, even outside of Asia, could disrupt international financial flows to others, as seen in 2018. Overall, issuers in countries with domestic macroeconomic or political challenges are more vulnerable to such episodes of global investor risk aversion, while those in countries with stronger growth, deeper financial markets and multiple instruments in their policy toolboxes are more resilient.