US downgrade has no immediate impact on Asia-Pacific, says S&P

KUALA LUMPUR: Standard & Poor’s Ratings Services, in what is likely a possible move to calm frayed nerves, said that there was no immediate impact on Asia-Pacific sovereign ratings resulting from the historic lowering of the United States’ credit ratings last Friday.

However, the US rating change, together with the weakening sovereign creditworthiness in Europe, did point to an increasingly uncertain and challenging environment ahead, it said.

“Uncertainties in the global financial market and weakened prospects in the developed economies have further undermined confidence.

“The potential longer-term consequences of a weaker financing environment, slower growth, and higher risk aversion are negative factors for Asia-Pacific sovereign ratings,” the rating agency said in a statement Aug 8.

S&P said that for the moment, the generally stable outlooks for Asia Pacific sovereigns (with the exception of New Zealand, Japan, Vietnam, and the Cook Islands) was supported by sound domestic demand, relatively healthy corporate/household sectors, plentiful external liquidity, and high domestic savings rates.

“Our baseline assumption of no likely abrupt dislocations in developed economies’ financial and real economies underpins this opinion,” it said.

However, given the interconnectivity of the global markets, an unexpectedly sharp disruption in developed world financial markets could change the picture, it said.

It could lead the US and European economies into deep contractions again, or further delay their recoveries, it said.

The rating agency said that in this scenario, the experience of the global financial crisis of 2008-2009 showed that export-dependent economies with large exposures to the US and/or Europe would feel the most pronounced economic impacts.

“US and Western Europe remain significant markets for Asia-Pacific exports, even if their importance has declined over the past couple of years compared with intraregional and Central & Eastern European/Middle East/Latin American trade.

“Specifically, Thailand, Taiwan, Korea, Malaysia, the Philippines, Japan, Australia, and New Zealand are likely to experience export-driven slowdowns either through weaker demand or lower export prices, or both,” it said.

At the same time, the Asia-Pacific sovereigns that have weaker external positions could come under pressure as international liquidity tightens, it said.

S&P said some may require additional external assistance to prevent sharp economic adjustments, adding that those with financial systems reliant on off-shore markets may face reduced liquidity and a heightening of refinancing risk in the near term.

To varying degrees, Pakistan, Sri Lanka, Fiji, Australia, New Zealand, Korea, and Indonesia may be affected, it said.

The adverse impact on Asia Pacific in that scenario would likely require governments to use their balance sheets to support their economies and financial sectors once again.

“And, in our opinion, most governments would promptly oblige. But some of them continue to bear the scars of the recent downturn—the fiscal capacities of Japan, India, Malaysia, Taiwan, and New Zealand have shrunk relative to pre-2008 levels.

“If a renewed slowdown comes, it would likely create a deeper and more prolonged impact than the last one,” it said.

S&P said the implications for sovereign creditworthiness in Asia-Pacific would likely be more negative than previously experienced, and a larger number of negative rating actions would follow.