Moody’s is negative on Asia’s sovereign creditworthiness in 2024 as China growth slows

Moody’s Investors Service has a negative outlook for sovereign creditworthiness in Asia-Pacific this year, due to China’s slower economic growth as well as tight funding and geopolitical risks.

China’s rebound from the Covid-19 pandemic wasn’t as fast as several economists had expected at the start of 2023. The country’s GDP for the last three months of 2023 rose by 5.2%, according to the National Bureau of Statistics, missing estimates of 5.3% in a Reuters poll.

In a Jan. 15 report, Moody’s predicted China’s real GDP growth would slow to 4% this year and next, from an average of 6% between 2014 and 2023. The credit rating agency said the slowdown in China’s growth “significantly influences” APAC economies because of its strong integration in global supply chains.

Goldman Sachs and Morgan Stanley, among other major international investment banks, predict China’s economy to grow at a slower pace of 4.6% in 2024, down from 5.2% expected for 2023.

On top of the “lackluster situation in China,” tight funding conditions will also weigh on Asia-Pacific sovereigns, Christian De Guzman, senior vice president at Moody’s Investors Service, told CNBC.

“This is also predicated on global liquidity conditions where we really don’t see the Fed easing until the middle of the year,” Guzman said on CNBC’s “Squawk Box Asia” on Monday.

“And Asia-Pacific central banks – we don’t see much decoupling [from] global liquidity conditions there.”

The Federal Reserve in December voted to hold interest rates at a 22-year high, but expects three cuts to come in 2024 as inflation eases.

The Moody’s report said high interest rates will prevent material gains in debt affordability, though rates are expected to ease gradually. As a result, international financing will remain difficult for lower-rated sovereigns, it concluded.

Guzman also said strategic tensions between China and the U.S. will persist.

China is a top trading partner for most Asian nations, while the U.S. remains an important economic partner as well. As the wedge between China and the U.S. widens, it may be increasingly difficult to maintain this balancing act, according to a 2018 World Economic Forum report.

That could also mean opportunities for countries with large manufacturing bases and improving infrastructure such as India, Malaysia, Thailand and Vietnam, as companies diversify supply chains away from China to mitigate geopolitical risks, the Moody’s report wrote.

Broadly firmer growth driven by domestic demand and regional trade amid easing financial conditions could improve the region’s outlook to stable, said Moody’s.