APAC sovereigns vulnerable if China sees further Covid-19 outbreaks: Fitch

July 28, 2022 (MLN): Fitch ratings in its latest report said that additional pandemic-related disruption in China, could affect the creditworthiness of other sovereigns and territories in APAC through channels such as trade, tourism and financing.
 

The rating agency assumes China’s “dynamic zero-Covid” policy will remain in place well into 2023.

Mass testing and localised controls should prevent the re-imposition of economically disruptive lockdowns in 2H22. However, if there is an additional pandemic-related disruption in China, it could affect the creditworthiness of other sovereigns and territories in APAC through channels such as trade, tourism and financing, the report said.

China is the biggest export market for most Fitch-rated APAC sovereigns and territories. It is also an important supplier of intermediate products whose availability could be interrupted, affecting regional exports. Many Asian economies have a high degree of trade openness, amplifying the effect on their GDP.

Weaker near-term regional growth prospects would weigh on sovereign credit metrics. Fiscal consolidation could be delayed or reversed due to slower growth or the use of fiscal stimulus to offset external headwinds.

In the wake of the Covid-19 pandemic and the Russia-Ukraine war, an additional shock from slower growth in China could also exacerbate credit risks in frontier markets, potentially eroding their political and institutional stability.

Increased investor risk aversion linked to a China slowdown may also add to financing strains for some APAC sovereigns, although many have external buffers that could cushion the effect, at least for one or two years.

Sovereign vulnerability to a China growth shock varies. Those at the lower end of the rating spectrum, such as Laos (CCC), Pakistan (B-/Negative) and Mongolia (B/Stable), would have multiple channels of exposure and their ratings may face downward pressure.

India (BBB-/Stable), with fewer exports to China, is less exposed, although its high public debt leaves little headroom to respond to shocks. For some other APAC sovereigns and territories, potential threats to export demand may be mitigated by external buffers or rating headroom.

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