Standard & Poor's has revised India's sovereign ratings to 'positive' from 'stable' earlier in February this year, due to fiscal improvement, a top S&P's official said in Hyderabad on Friday.
Addressing a media conference on the sidelines of the 39th annual meeting of the board of governors of ADB, Ping Chew, director, sovereign (International Public Finance & Financial Services Ratings, Asia), said that in February this here, S&P's forecast that Asia's rated sovereigns would fare well this year and so far rating actions have been generally positive.
"Since that last round-up, the outlooks on Hong Kong and India have been revised to positive from stable because of fiscal management. This follows the revision on the outlook on Indonesia to positive from stable and the Philippines' to stable from negative.
"The only negative rating action has been on Sri Lanka, the outlook on which was revised to negative because of the escalating military conflict," he said, pointing out that the sovereign update was released earlier in the day.
The update pointed out that "by and large, credit quality among Asia's sovereign governments is continuing its favourable trajectory, despite high oil prices, rising interest rates globally and the return of inflation as a concern in the United States. Of the 19 sovereigns in Asia-Pacific rated by S&P's Ratings Services, eight have a positive outlook and two a negative outlook.
"The major economies of the Asia-Pacific region are forecast to achieve good growth for 2006 despite the threat of rising oil prices and interest rates. Indeed, it seems likely that oil prices and interest rates are being driven higher in large part by strong global economic growth. So long as this is the case, the risks to global economic growth will be low," the S&P's official said.
"This general assessment applies to Asia because of its ties to the US business cycle through exports. It also means that countries that tend to be less engaged with the global economy (that is, those with largely closed economies) would feel more of the adverse
consequences of high oil prices and interest rates," according to the latest S&P's update.
Fielding questions on the effect of oil prices remaining above $ 70 a barrel, Chew said that the rise of oil prices to current levels has had limited impact on sovereign credit quality in the region.
Continued growth of exports to the US has helped Asian economies to maintain healthy growth despite higher energy costs. Going forward, tightening monetary policy in response to rising inflation could rein in growth somewhat.
"Nevertheless, the general appreciation of the region's currencies against those of major trading partners should temper the need for further interest rate hikes. The key event that could mar the largely benign picture is an oil-supply shock.
"In this scenario, both high oil prices and interest rates would simply reflect severe supply constraints, and economic growth would definitely suffer," he said.
However, rising oil prices have had an impact on the budgets of several Asian sovereigns. Particularly affected are those that subsidise or control fuel prices. While oil subsidies are nearly always detrimental to the economy and to government finances, the way they are implemented in some countries can make it worse.
"When the subsidised oil prices do not react to market conditions at all, demand for oil does not fall in response to market conditions. This worsens the strains on government finances and balance of payments.
A notable member of this category is Indonesia. Despite the reduction in subsidies last year, domestic fuel prices in the country remain less than half international prices. Further increases in oil prices from current levels could subject public finances and the balance-of-payments to another bout of pressure," Chew explained.
To varying extents, similar problems face other sovereigns that subsidise or control fuel prices - the People's Republic of China, India, Malaysia, Sri Lanka and Vietnam. "Malaysia has raised its fuel prices, while India could be forced to raise its minimum price later this year. India has already had to issue Oil bonds to fiscalise the losses at the state oil companies," he added.
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