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Asia at risk from inflation, Fitch says

Growth in Asia's developing economies is at risk from rising inflationary pressure, which may hurt its competitiveness, Fitch Ratings said.

The region's expansion will probably slow to 7.7 percent next year from an estimated 8.7 percent this year, a team of Fitch analysts led James McCormack wrote in a report released in Hong Kong today. Inflation will quicken to 4.8 percent next year from 4.3 percent this year, they predicted.

Asian central banks are combating rising prices at a time when economic growth in the US, the biggest market for most of Asia's export-dependent economies, is slowing. The region is almost twice as reliant on exports as the rest of the world, with 60 percent of sales abroad ultimately destined for the US, Europe and Japan.

RISING PRICES

"Rising food, energy and housing prices are evident in several countries and there are risks inflation could become more entrenched," Fitch said. "Greater openness to trade and investment flows implies regional economies are increasingly affected by global developments and investor sentiment."

Still, an easing in the pace of economic expansion is not likely to hurt the credit ratings of the countries around the region, the company said.

"The prospect of slower GDP and export growth poses no immediate threats to emerging Asian sovereign ratings since most countries continue to run current account surpluses and have record-high levels of official foreign-exchange reserves," the report said.

The US economy will probably expand 1.7 percent next year, slowing from an estimated 2.2 percent this year, Fitch forecasts.

"If a sharp US slowdown were accompanied by a pronounced depreciation of the US dollar, the implications for emerging Asia could be even greater," Fitch said. "It could be difficult to preserve Asian competitiveness via exchange rates if the US dollar were under intense downward pressure."

CHINA

China's growth will probably slow to 10.1 percent next year, from 11.4 percent this year, Fitch predicts. The central bank will probably continue to crack down on bank lending via interest-rate increases and higher reserve requirements for banks, it said.

"The People's Bank of China has adopted a clear policy tightening bias, but it is uncertain how effective monetary policy will be if authorities are reluctant to initiate actions that could undermine economic growth," Fitch said.

"Policymakers may also hesitate to raise interest rates if resultant increases in capital inflows put further upward pressure on exchange rates," it said.

China's central bank manages the yuan against a basket of currencies and allows it to rise or fall daily by up to 0.5 percent against the dollar from the so-called central parity rate.

"More rapid exchange rate appreciation would help curtail inflation," Fitch said, adding it doesn't expect any "significant change" in China's yuan policy next year.

Still, "higher inflation or a protracted depreciation of the US dollar could cause the PBOC to step up the appreciation of the renminbi," it said.

Fitch, in its assessment of India, said it expects the nation's currency to remain subject to further appreciation pressures next year amid capital inflows. The rupee has gained 12.3 percent against the US dollar this year.

In Indonesia, Fitch said it expects the central bank will slow the pace of interest-rate reductions. Bank Indonesia unexpectedly cut its benchmark rate by a quarter point to 8 percent on Dec. 6, its seventh reduction this year.
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