Brexit credit impact on APAC sovereigns to be limited: Moody’s

PTI Mumbai | Updated on January 17, 2018 Published on July 11, 2016

Global rating agency Moody’s today said the UK’s decision to leave the European Union is unlikely to impact Asia-Pacific sovereigns, but external finance dependence may pose vulnerability for some countries.

“We do not expect the vote of UK (Aa1 negative) to leave the European Union (EU, Aaa stable) to have a significant credit impact on Asia-Pacific sovereigns,” the rater said in a report here today.

Although lower GDP growth in the UK will dampen demand for products from the rest of the world, Asia-Pacific’s direct trade linkages with the country are generally limited, it said.

Most Asia-Pacific sovereigns have minimal reliance on exports to the UK—Cambodia (B2 stable) is the most exposed, with exports to the UK worth 5.8 per cent of GDP in 2015.

The report does not foresee a large impact on trade or GDP growth in the region.

Announcements related to Brexit in the coming months may trigger financial market volatility, said the agency.

“While it is not our baseline expectation that there will be a significant shift in portfolio or banking flows to the region, if global financial volatility results in tighter external financing conditions, it would hurt growth in countries where fiscal and monetary policy space is already constrained,” the report said.

It, however, added that potential market volatility resulting from Brexit would affect Asia-Pacific sovereigns that depend on external financing.

Out of those Asia-Pacific countries that have large current account deficits, Mongolia (B2 negative) relies in part on private sector financing flows.

“In addition, both Mongolia and to a lesser extent, Sri Lanka (B1 negative) have significant debt repayments due in 2016. Consequently, any severe and prolonged market volatility could heighten balance of payments pressures for these two sovereigns,” the rating agency said.

It saw the impact on financial flows into Asia from the UK and other European banks as “uncertain“.

As international financial centres, Hong Kong (Aa1 negative) and to a lesser extent, Singapore (Aaa stable) would be exposed if financing flows from the UK and European banks ebbed, it added.

However, there is a possibility that these centres could benefit if UK and European banks aim to diversify their asset bases.

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Published on July 11, 2016
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