The gross domestic product (GDP) growth in Asia Pacific (APAC) is moderating at a stable pace, supported by a gradual easing of global financial conditions.
Falling inflation will provide space for monetary policy normalisation but possible inflationary measures from the new US (Aaa negative) administration pose risks to the pace of policy easing. Meanwhile, geopolitics will continue to pose risks to the global trading environment.
Finding new normal amid stabilising macro conditions
Expectations of more stable macroeconomic conditions are restoring market confidence, and dollar bond spreads for APAC issuers have been narrowing. However, given the risk of potentially inflationary measures from the new US administration, the US Federal Reserve may not ease quite as much as we had previously envisioned and policy rates in this region could still remain above levels of the last decade. Downward pressure on capital outflows and currencies in APAC could resurface.
Geopolitics will remain at the forefront
President Donald Trump has announced additional 10% tariffs on Chinese imports to take effect on 4 February. He has also ordered a comprehensive investigation into US trade policy, which is set to conclude by April and will signal US long-term trade policy. A further intensification of geopolitical pressures would harm APAC, as fragmentation policies are likely to reduce activity in major trading partners.
The share of stable outlooks in APAC is similar to last year
Banks in China (A1 negative) will continue to face difficult credit conditions in 2025, but conditions for Chinese nonfinancial companies have stabilised on the back of supportive government measures. A stable outlook has been maintained for nonfinancial companies and most of the banking systems in the rest of APAC. However, refinancing risks will remain elevated for companies reliant on the high-yield market. As for sovereigns, the stable outlook in part reflects resilient domestic demand bolstered by modest easing in global and regional financial conditions. However, significant fiscal consolidation in a number of regional sovereigns continues to be hindered by higher debt and elevated interest burdens even as inflation eases. Overall, government debt will be stable but elevated for many sovereigns.
Moody's Ratings report re-disseminated by The Asian Banker