Economic activity in Asia Pacific to hold up well, but vulnerabilities lie: Fitch

HONG KONG - Economic activity in the Asia-Pacific region will broadly hold up well, but potential vulnerabilities lie ahead due to increased protectionism, a stronger US dollar and higher political risks, ratings agency Fitch said in a report released on Monday.

The median forecast for real gross domestic product for 11 emerging markets in Asia is 5.5 per cent, substantially higher than in other regions, the Outlook for Emerging Markets (EM) Asia report said.

The rate was 3.5 per cent for EM Middle East and Africa, 2.9 per cent for EM Latin America and 2.8 per cent for EM Europe. Without China, which makes up 69 per cent of the region's GDP, the weighted average growth is expected to be 6.3 per cent in 2017 and 6.4 per cent in 2018, from 5.9 per cent in 2016, it added.

All EM Asia entities, except Mongolia, are expected to grow faster than the medians of their rating categories.

Global trade in 2017 will present limited upside for EM economies in the region, while a long-term growth impetus seems off the table after President-elect Donald Trump said the US will pull out of the Trans-Pacific Partnership (TPP) trade pact. "It is unclear to what extent regional alternatives, such as the China-led Regional Comprehensive Economic Partnership, can make up for this loss," the report said.

Domestic sources of growth include an infrastructure boost and the implementation of ambitious reform agendas in some Asian economies, such as India and Indonesia.

Room for monetary and fiscal policy easing differs from country to country, with limited room for a policy rebalancing from monetary to fiscal stimulus similar to what Fitch expects in advanced economies. Public debt levels are high in some countries, such as India, and credible fiscal policy rules prohibit further fiscal stimulus in Indonesia.

A strong US dollar in 2017 amid signs of US Fed Reserve's intentions to raise rates, and increased public spending in the US, could weigh on economies with large external refinancing needs and/or those that rely heavily on foreign-currency-denominated debt.

Vulnerabilities are building up further in China, as policy settings continue to prioritise rapid growth over macroeconomic stability and debt levels across the economy continue to rise, at least until 2018. But China still has the administrative and financial resources to address these imbalances without a disorderly adjustment, even though its capacity to do so diminishes with time if not addressed.