US tariffs are hitting exports from China and the rest of the Asia-Pacific (APAC) region, but Fitch Ratings expects growth in the region to remain higher than in other parts of the world.
The firm said that a weaker US dollar and the ability of some central banks to cut policy rates will help cushion the impact of softer global demand.
However, it noted that these headwinds are already weighing on the fiscal consolidation efforts of several governments.
Fitch Ratings added that policy responses to weaker global demand and uncertainty will be crucial in easing the impact of these headwinds on sovereign credit profiles.
“Some governments are raising spending to support households and alleviate the high cost of living, even though inflation is largely subdued in APAC, often signalling weak domestic activity.
“We believe that recent violent protests in countries such as Nepal, Indonesia and the Philippines could add to spending pressures,” it said.
Fitch Ratings also said that deep domestic capital markets have supported the financing of fiscal deficits in some countries, although many have seen their fiscal headroom reduced.
It noted that fiscal consolidation has generally been modest since debt levels rose sharply during the Covid-19 pandemic.
Most APAC sovereigns are on a stable outlook, with the exception of Thailand, which is on a negative outlook.
This reflects increasing risks to its public finances due to prolonged political uncertainty, slowing global demand, a delayed tourism recovery and household deleveraging.
So far this year, Fitch Ratings has upgraded Pakistan to ‘B-‘ from ‘CCC+’ and Uzbekistan to ‘BB’ from ‘BB-‘, reflecting progress in reform implementation in both countries, as well as Pakistan’s adherence to its IMF programme and improved funding availability.
The firm downgraded China to ‘A’ from ‘A+’ in April, citing expectations of continued weakening in its public finances and a rapidly rising public debt trajectory during the country’s economic transition.
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