But the US-based credit ratings firm warned that the road to recovery is fraught with challenges as countries still face weak demand for their exports and government stimulus packages put a strain on fiscal balances.

'The worst of the economic dislocation in Asia-Pacific appears to be over, if recent indicators are to be believed,' Standard and Poor's said in a statement.

It cited the recent strong performances of regional stock markets and a significant narrowing of the spread between the London Interbank Offered Rate (Libor) and the overnight index swap (OIS) rate.

The Libor-OIS spread indicates the health of the credit markets, and its narrowing means that bank funding costs would come down, allowing easier credit to fund economic activity.

Other positive signs include 'a partial recovery in commodities prices, the abatement of deflationary concerns and less risk aversion among investors,' it said.

But Standard and Poor's also cautioned that 'fiscal deterioration resulting from stimulus and banking sector support measures will continue to put pressure' on the credit ratings of countries in the medium term.

'Steep declines in exports, especially in East Asia, have led to significant contractions in economic output,' Standard and Poor's analyst Kim Eng Tan said.

'In the next year or so, corporate defaults will likely rise as a result. The pressures will mount on banking systems in the region, particularly those that are highly leveraged.'

Mr Tan said the downgrading of the outlook for India and Taiwan from stable to negative reflected 'the fiscal deterioration associated with providing support for their respective economies.' Many governments around the world, including those in the Asia-Pacific region, have rolled out massive spending measures to stimulate their economies amid the global slump. -- AFP