Fitch: Asia Growth to Normalise, Not Collapse as Pressures Mount

Emerging Asia's real GDP growth should slow to 6.3% in 2016 as regional economic pressures continue to add to a challenging outlook, says Fitch Ratings. That said, effective policy responses and sovereign buffers should provide a degree of protection, and the slowdown is better understood as a normalisation of growth rates and not an uncontrolled collapse. A hard landing in China is unlikely, and growth in India and in ASEAN should pick up. We forecast emerging Asia as remaining the fastest-growing emerging markets region in 2016.

Fitch's latest Global Economic Outlook, published yesterday, forecasts global growth to pick up slightly in 2016. Issues linked to lacklustre trade and investment growth remain. But major advanced economies such as the US, Eurozone, UK and Japan seem to have emerged relatively unscathed from the slowdown in key emerging markets in 2015. We forecast global growth to accelerate to 2.6% in 2016 and 2.7% in 2017, from 2.3% in 2015.

In Asia-Pacific, the outlook remains challenging with added economic pressures from the continued slowdown in China's growth, sluggish global trade growth, and an expected rise in US rates and resulting dollar strength. The expected slowdown in emerging Asia, however, is likely to be driven almost entirely by China. Fitch forecasts Indian growth to accelerate to 8% in the fiscal year ending March 2017, while emerging Asia excluding China and India should grow by 5.2% in 2016, up from 5% in 2015.

One potential downside risk to regional growth could come from high private-sector debt, which is still rising. Four Asian emerging markets have the highest ratios of bank private-sector credit to GDP of any Fitch-rated emerging markets - China, Malaysia, Thailand and Vietnam. Upward pressure on regional interest rates stemming from the US may weigh on domestic demand in more indebted economies.

Fitch maintains its view that the China slowdown is part of a broader structural adjustment necessary to achieve a more sustainable growth pattern. The data thus far from 2015 supports this picture, with weak exports and investments being offset by relatively robust consumption and a solid labour market. Importantly, the scenario of a very sharp slowdown in Chinese growth following the financial market volatility in the summer has not played out. This has reinforced the view that China is likely to muddle through during its structural-adjustment processand avoid a hard landing. 

The Chinese authorities maintain significant resources and capacity to avoid a disorderly deceleration. Fitch has raised its forecast 2017 growth rate for China to 6% from 5.5%, based on the latest Five-Year Plan which suggests a growth target of 6.5% for 2016-2020.

More broadly in Asia, sovereign rating outlooks are mostly stable despite the general outlook and mounting regional pressures. The risks of a financial crisis akin to 1997 are significantly mitigated. External balance sheets are stronger in the region; sovereigns rely less on foreign-currency funding than in 1996; and most countries now also benefit from flexible exchange-rate regimes.

Macroeconomic policy responses thus far have also helped to buffer credit profiles. This is especially the case in Indonesia and Malaysia, which stand out as relatively more exposed to external risk factors than other major economies in the region such as the Philippines and Vietnam.