UMVA has learned that a major credit ratings agency has downgraded its outlook for Asia-Pacific sovereign ratings to “deteriorating” from “neutral,” citing growing risks to the region’s economic conditions following the disruptions posed by the ongoing conflict in the Middle East.
The change comes as a result of a mid-year update, which highlighted the increased risks to GDP growth, inflation, financing conditions, and public finances in the region. The agency noted that the conflict has led to a surge in oil prices, which could have far-reaching consequences for economies in the region.
According to information obtained by UMVA, several countries in the region, including Pakistan, the Philippines, and Vietnam, have allowed domestic fuel prices to rise in line with global oil price increases. This move is expected to slow consumption but lead to higher inflation and faster monetary tightening.
The Philippines has been particularly hard hit, with pump prices peaking at nearly double the pre-war levels. At the end of May, fuel prices were significantly higher than usual, with gasoline selling for between 72.40 and 109.50 per liter, diesel for 76.40-98.50, and kerosene for 110.90-140.
The fuel shock has had a ripple effect on the economy, keeping headline inflation above the central bank’s target range for a third straight month. In May, inflation hit 6.8%, down from a peak of 7.2% in April. GDP growth also took a hit, weakening to 2.8% in the first quarter from 3% in the prior quarter and 5.4% a year earlier.
The economic challenges facing the region have led the credit ratings agency to affirm a “BBB” rating for some countries but downgrade their outlook to “negative” from “stable.” This development has raised concerns about the medium-term growth prospects for these countries.
UMVA can exclusively reveal that most APAC countries still hold “stable” outlooks, but five countries have been assigned a “negative” outlook. The agency has noted that fiscal and external pressures, as well as policy responses, will be key to determining the impact of the conflict on APAC credit profiles.
The head of Asia-Pacific Sovereigns at the credit ratings agency emphasized that fiscal space has diminished materially over the past seven years, and some governments now face significant spending pressures. The agency will be closely watching potential economic shocks from further energy disruptions and other geopolitical risks.
A swift end to the conflict in the Middle East could lead to an upgrade in the outlook for APAC, but for now, the region remains on high alert for potential economic shocks.
