Emerging economies likely to hold up well despite persistent sluggish world trade, says Fitch Ratings

Economic activity in the Asia-Pacific region is broadly expected to hold up well, even as many emerging-market Asian (EM Asia) countries are severely hit by persistently sluggish world trade due to their relative openness.

The Outlook for EM Asia sovereign ratings in 2017 is Stable, but potential vulnerabilities include increased protectionism, a stronger US dollar and higher political risk across both advanced and emerging economies. Nine of the eleven Fitch-rated EM Asia sovereigns carry a Stable Outlook as we approach year-end, Fitch Ratings reported.

Global trade in 2017 will present limited upside for EM Asia and a long-term growth impetus presented by the Trans-Pacific Partnership (TPP) trade pact now seems off the table after President-elect Donald Trump said the US will pull out of the agreement.

Some Asian countries, like Vietnam, were expected to gain substantially from the TPP. It is unclear to what extent regional alternatives, such as the China-led Regional Comprehensive Economic Partnership, can make up for this loss.

"Limited room seems to exist in EM Asia for a policy rebalancing from monetary to fiscal stimulus similar to what Fitch expects in advanced economies. Among EM Asia entities, Fitch expects a widening of the fiscal balance in 2017 only in the Philippines," the report said.

Meanwhile, EM Asia countries are relatively exposed to a severe China slowdown scenario, though that is not our base case. Vulnerabilities are building up further in China, as policy settings continue to prioritize rapid growth over macroeconomic stability and debt levels across the economy continue to rise, at least until 2018.