Standard & Poor’s, the global ratings institution, is encouraged by the performances of China, India, and Indonesia, and it expects that the Asia-Pacific region will continue its pattern of positive GDP growth, in contrast to most other parts of the world that are posting contractions. These three Asian countries are ranked as the fastest growing economies in the Asia-Pacific in 2009, and they have aided the region in staving off an overall contraction, says Standard & Poor’s (S&P).

Regional growth dynamics suffered a big dent during the year, with the unweighted average growth rate among rated sovereigns dropping to 0.7 per cent, compared with 4.2 per cent the year before and a record 6.6 per cent in 2004. Nevertheless, spurred by China, India and Indonesia, Asia-Pacific regional growth has stayed in positive territory, unlike most regions around the globe.

Huge Debt

India’s general government deficit remains the worst among rated Asia-Pacific sovereigns in 2009

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In the last quarter of 2008, several Asian economies slipped into recession and subsequently posted sharper contractions in the first quarter of 2009, as the impact of reductions in global exports began to be felt. In particular, the more affluent economies like Japan, Taiwan, Hong Kong and Singapore suffered a sharp blow, given their relatively greater degree of trade and financial integration with the US and Europe.

Commodity exporters Malaysia, Thailand and New Zealand, also saw significant contraction on account of the plunge in commodity prices within a short span of time. Australia weakened too, but avoided outright recession, due partly to a substantial policy stimulus and unexpected underlying demand for its base metals exports.

On a positive note, strong domestic demand coupled with decisive expansionary monetary and fiscal responses, have significantly helped China, India, Indonesia and Vietnam in maintaining respectable growth rates in 2009.

Mounting Deficit

Countries with high current account deficit run the risk of rapid declines in currencies

Change at the top

Interestingly, despite the sharp fall in global exports demand, more than half of the countries in the Asia-Pacific continue to run current account surpluses. Thailand and Korea will start seeing their short-lived 2008 deficits return to surpluses in 2009, S&P says in its report titled, “The Best and the Rest: The 2009 Asia-Pacific Sovereign League”.

Though in 2009 Japan continues to be the largest economy in the region, S&P expects China will displace the land of the rising sun from the top spot. “Given China’s continued high growth, even in the face of global recession, it is a question of when, not if, China leapfrogs Japan to be the largest economy in the Asia-Pacific. In all likelihood, China will do so by 2010. Globally, China ranks as the third-largest economy, having overtaken Germany and France,” says YeeFarn Phua, S&P analyst, in Singapore.

China remains the fastest-growing economy in the Asia-Pacific in 2009. After four straight years of scorching double-digit growth, the expansion of the Chinese economy finally eased to single digits in 2008 and 2009 , states the S&P report. “We also expect the India growth story to continue, albeit at a slower pace, with the country at number two in the regional league.”

Richest and poorest

However, the scorching growth in China and India has not yet translated into higher-ranking per capita wealth among the Asia-Pacific nations. The two Asian giants were ranked at the bottom half of the league by this measurement, which is similar to their respective rankings at the beginning of the decade. Although GDP per capita has more than tripled in China and nearly doubled in India from eight years ago, both countries remain similarly ranked vis-à-vis 2001.

In terms of GDP per capita, S&P expects Japan, Australia, and Singapore to continue to lead the pack, with Hong Kong still out of the top three. The Special Administrative Region’s ranking has suffered lately, due to pegging of the Hong Kong dollar to a weakened greenback.

Japan’s per capita wealth, which during the early 1990s was among the highest in the world, is now close to the average among members of the OECD (Organisation for Economic Cooperation and Development). And although the Japanese economy has somewhat emerged from its ‘lost decade’ of the 1990s, it is likely that Australia will overtake Japan in terms of GDP per capita in the next two or three years. Cambodia and Pakistan remain the poorest and their rankings are not expected to change in the near term.

India deficit worst

The other big concern is that the enormous stimulus announced by Asian nations to ward off recession has led to huge budget deficits. But there are large variations in the magnitude of deficits, reflecting the different underlying fiscal stances of sovereigns in the absence of countercyclical stimulus needs.

Singapore, which topped the rankings for general government balance for several years running, dropped to fourth place in 2009. In the top spot is Indonesia, which leaped from number nine the year before.

In the Asia-Pacific, the average government balance in 2009 deteriorated to -4.6 per cent of GDP from -2 per cent the year before. Even the governments of Singapore and Australia, which have traditionally stuck to fiscal prudence, will run budget deficits for the first time in many years. However, they are expected to return to fiscal surpluses once recessionary pressures abate.

India’s general government deficit remains the worst among rated Asia-Pacific sovereigns in 2009. S&P says that the deteriorating fiscal position has translated into a bigger net debtor position, which is indicative of its current negative outlook on India’s credit ratings.

Japan remains the most indebted government in the Asia-Pacific, alone accounting for about three-quarters of the region’s total gross debt stock. At the other end of the spectrum, Singapore and Hong Kong, with decades of accumulated fiscal reserves, continue to be at the top in the net creditor list for the Asia-Pacific sovereign league.

Catching Up

China may soon pip Japan as the largest economy in Asia-Pacific, while Australia is likely to overtake Japan in terms of GDP per capita in the next two or three years

Foreign funding

S&P analysts found during the ranking process that sovereigns in the region have been increasingly tapping international capital markets in 2009, bucking the recent trend of heavier reliance on domestic funding. Average public sector external debt in the region is estimated to have risen to 35 per cent of current account receipts in 2009, from 32 per cent in the year before.

The previously declining trend in external public sector debt is seeing a brief reversal in 2009. Since the beginning of the decade, a global trend had emerged of governments relying less on external funding and increasing their funding from domestic debt markets. But recent budget deficits have widened to an extent that has necessitated sovereigns to explore a greater variety of funding sources, including external.

This is especially so among the Asia-Pacific countries, where domestic capital markets are shallow and crowding out of the private sector could occur. Also, the denominator (current account receipts) has shrunk, contributing to a higher ratio for some like Japan. Notably, much of the public external debt (like in Pakistan, Sri Lanka, and Mongolia) is made up of concessional multi and bilateral loans with low servicing costs. In addition, the US and Russian debt forgiveness has reduced external public debt for Pakistan and Mongolia.

Growth story intact

Signs of a pick-up across the region and the global economy in recent months suggest that recessionary conditions may have bottomed out. Still, the Asia-Pacific economies will continue to face the challenge of offsetting slow external demand by creating enough domestic demand for locally produced goods.

Supportive monetary and fiscal action and the China factor had somewhat stabilised regional economies through the global recession. But, at this stage, any premature withdrawal of fiscal stimuli and/or persistent sluggishness in the US and Europe could derail the recovery prospects, says S&P.