State Of The Economy With Fitch Ratings’ Stephen Schwartz

by birtanpublished on June 29, 2020


hello and welcome to Bloomberg quint the

expectation for the asia-pacific region

and the economies and government

finances is that the second half would

look a little bit better that's the

expectation from Fitch Ratings only to

expect other pressure on sovereign

ratings to perhaps continue joining us

to talk us through what he makes the

evolving situation across economies and

governments lenses if Stephen Schwartz

head of solid ratings in the

asia-pacific at which Stephen thank you

so much for taking the time to speak

with us now I am going to start with a

broad question on what your current

assessment of the second half of the

year looks like I know that your last

published read note suggested a pick up

in the second half does that remain

unchanged given that we have seen

concerns about a second wave in some

countries and in other countries like

India despite strict lock downs we

haven't really seen the pace of

infections ease of you know very

material wait are you real justing out

of the second half we're constantly

readjusting the outlook given all of the

uncertainty for many of the reasons you

just mentioned but our global outlook

indeed is for a growth pick up in the

second half of the year and here in the

Asia region we expect quarterly growth

momentum after deep deep lunges

especially in the second quarter to turn

around as lockdown restrictions are

eased and activity gradually gets back

to positive momentum so we see positive

growth returning to most countries

around the region in the third and

fourth quarters of the year but that

will still mean large economic

contractions for much of the region on a

full-year basis of one bright spot

economically is we're growing more

confident that China's economic recovery

is intact and we have a full-year

positive growth outlook for China 07%

and in our next update due out in just a

couple of days we're likely to nudge

that up to just above one person

but the region excluding China would we

see more or less all economies seeing a

contraction this year or which are the

economies or which have the steepest

contraction penciled in from your end

yeah well India is one of the steepest


we're expecting a contraction of 5% for

the current fiscal year we're also

seeing contractions on a similar

magnitude in Japan some bright spots

where we might revise up our growth

outlook where we previously expected a

deep contraction in Australia they've

gotten a pretty good control of the

virus and it looks like while they'll

still be a full year contraction in

Australia it might not be quite as bad

as we thought we originally thought it

might be over 5% for the year there are

only a handful of countries in Asia

where we're expecting positive growth

for the full year I mentioned one which

is China Vietnam is also a reasonably

positive growth story they're still

benefiting from all of the foreign

direct investment and trade diversion

that was occurring last year and they

also have a handle on on the virus by

all accounts Laos is another frontier

market that we rate they might just ego

positive growth momentum this year in

Bangladesh also looks set to record

positive growth by our estimates for the

year everywhere else they were expecting

contractions of varying degrees for the

full year but with some positive growth

momentum returning in the second half

Anna and I will note though as you

flagged rightly that these forecasts are

subject to considerable uncertainty due

to the evolution of the epidemic and

it's not at all encouraging in the last

couple of weeks that we're seeing a

resurgence of the virus in the US

pockets elsewhere there in India you're

still really struggling to get a handle

on it and in Southeast Asia countries

like Indonesia and the Philippines are

still struggling to get a control on the

virus what about the rating changes or

adjustments to outlooks and ratings

we've seen the first line of sort of

government stimulus

government support packages across most

countries would you say that the rating

adjustments are done for now and would

now take a view on 2021 or FY 2022 in

the case of India or would they also

depend on what happens in the second

half of the year you know we've already

the trade ins had a record year for

rating downgrades we've had 31

downgrades already this year so just in

the first half of the year we'd set a

new annual record for downgrades it

looks like the worst of the rating

downgrades may be behind us globally

speaking but here in Asia we've taken a

measured approach we've got a third of

our sovereign ratings on negative

outlook so that the theme in our recent

report we said an economic recovery but

with lingering rating pressures where

we've got negative outlooks we put Indy

on negative outlook just ten days ago

we've got negative outlooks on countries

like Malaysia even Australia and a

handful of others so I would say that

the negative rating action is not quite

yet over depending on the evolution of

the virus but we will be assessing

medium-term growth potential as this

crisis gets behind us because growth is

one way some of these countries can sort

of deal with their buildup in debt

burdens over the medium-term a big

question our mind is will this crisis

dent medium-term growth prospects where

we previously expect a very high medium

term growth and I will come to that in

the context of India I do want to

understand for you before that though

how you are adjusting for the relative

changes in economies just to explain my

question yes India will see an increase

of many percentage points in the debt to

GDP ratio in this one year but so would

a lot of other economies so how can you

adjust it for the relative changes both

in growth outlook and in some of the

other metrics like this the deficit or

debt to GDP which you are monitor more

more closely

yeah that's a great question you know we

tell investors that our raid

our relative rankings and their ordinal

in that sense and and so it wouldn't be

right to us for us to downgrade everyone

but to be honest it's really a blend

where we we do keep an eye on the

relative rankings but in this

environment we could see more down

grades to come we assess each country's

creditworthiness on a standalone basis

and where we're seeing big build-up and

debt ratios especially for countries

that went into this crisis with very

little fiscal space relative to their

rating peers those are the countries

where downward or negative rating

pressure is really building and another

ingredient in in the equation is we to

address your questions we really look at

countries track records in unwinding

stimulus measures after crises recede so

we look back to for example the global

financial crisis and we saw a big

buildup in debt ratios at that time but

some countries have a better track

record than others in unwinding that

stimulus and returning their debt

trajectories to a sustainable path let

me bring the conversation around to

India in that case you know it's been

interesting from the outside because

three large global agencies have taken a

fairly differing views on India you know

there are the likes the espys which are

a little bit less worried or a bit more

sanguine on the medium term growth house

outlook your latest rating release as

well as the Moody's seem to suggest that

the concern is both on how quickly the

debt to GDP would start to come down

post this crisis and whether there has

been a structural shift and potential

growth etc could you highlight I know it

you'll be able to give me relative

weightings but I work I want to

understand how much of this is about the

current crisis in India and how much of

it is what happened before the

medium-term yeah well let me start on a

couple of positives for India from a

ratings perspective the first is that

while there was little

full space going into the crisis there

was some Headroom with respect to the

rating just a couple of years ago at

triple B – we were seeing some positive

upward momentum in India's rating that

was because we assess that as an

emerging market India had amongst the

highest medium-term potential growth of

any emerging market that we read

globally we had assess that it was close

to 7% now that assumption is going to be

tested and we're going to be reevaluated

to see a really India can restore growth

to that potential over the medium-term

the other positive for India is that it

has very strong external finance as

compared to similarly rated peers its

reserves at over 500 billion dollars are

very strong in terms of serve adequacy

and coverage the sort of close domestic

nature of India's economy means it can

finance its deficits domestically rather

than relying on on volatile portfolio

flow so those are the positives the

negatives really were twofold one is

India went into this crisis with already

a very high public debt ratio close to

double the median and the trip will be

level India's public debt ratio going

into this crisis already above 70

percent as you said we're expecting it

to rise by at least 15 percentage points

in the coming year so it'll really be a

twice the the median level and that

weighs on the rating the other factor

we're looking at is the weaknesses in

the financial sector and that was one of

the things holding us back really from a

ratings upgrade just a couple of years

ago that together with a high public

debt ratio and what this crisis has

really done is is sort of exposed those

downside rating risks for India which is

why we refrained from an upgrade at that

time and why we've affirmed India's

rating at triple-b – but with that

negative outlook as we reassess the

medium-term outlook in the debt


so there's an interesting debate going

on locally and I don't even know how you

separate the two you know just like you


getting growth back is imperative not

only to the debt to GDP ratio and you

know bringing that down steadily but

also for the financial sector you know a

period of long slow growth will only

worsen financial sector conditions and

hence argument is made that if the

government needs to spend more into

ensuring or if that growth revival it

should but as you do that you see debt

to GDP ratios rise even further how do

you see this balance in from a ratings

perspective yeah quite right bit from a

macroeconomic perspective stimulus

measures are the right thing to do

there's a pressing health crisis

businesses are closed under lockdown

restrictions workers are being laid off

so both from a social and macroeconomic

perspective fiscal measures are the

right policy response as our

expansionary monetary policies of the

RBI is an example has been very

proactive and providing adequate

liquidity and trying to ease financial

conditions best it can under this

circumstance however from a ratings

perspective where we are assessing

creditworthiness and the relative fiscal

metrics and credit strengths against

other similar countries for a country

like India that already had a high

public debt ratio going into the prices

even if it's the so-called right macro

response to spend more as the crisis

unfolds it does undermine credit metrics

credit worthiness and from a ratings

perspective leaves India weaker than it

was going into the crisis so we do

recognize that some of these fiscal

measures may help spur growth in the

second half of the year that's very much

factored into our economic forecasts but

it does create

certainties about the medium-term a debt

projector at the same time so it's a

double-edged sword as you think about

the fiscal stimulus stimulus for

countries that had a little fiscal space

going into a crisis like this

Stephen how do you judge the financing

or fiscal deficit in India or across the

asia-pacific region because unlike

developed markets central banks which

have dumped in to buy large quantities

of government debt you know corporate

debt in some cases I think the response

from usual central banks has been a

little bit more restrained is that a

factor in ratings as to whether

governments cross over into direct

financing via central banks if required

or whether they remain restrained on

ensuring this goes through the market

mechanisms how would you judge are the

two scenarios for developing Asia Asian

economies has a near-term impact on our

ratings but it is something we're going

to evaluate after the crisis and over

the coming years to see just how central

banks are able to unwind some of these

stimulus measures without generating

instability in financial markets it's

really interesting that emerging markets

have been this time around

applying forms of quantitative easing

and to various degrees have engaged in

intervention in their domestic bond

markets Indonesia is gone all the way to

make purchases in its primary market

that's something that we have not seen

in emerging markets and other countries

such as the Philippines have been active

in the secondary market in trying to

stabilize bond yields and prevent a big

sell-off in the bond market so this is

increasing the balance sheets and these

of these central banks and and it will

create a challenge for them to unwind it

in a non inflationary way after the

prices pass it then in a way that

doesn't destabilize markets so many of

these central banks are sort of taking

the playbook from advance central banks

after the global financial crisis and

applying quantitative easing and there

right there is a subtle difference at

what they're doing compared to developed

markets develop markets they're trying

to keep borrowing costs low

they're keeping long term yields low to

help the public finances in this

environment whereas in emerging markets

it's more they're trying to stabilize

financial markets so it's something

that's working for the time being but

they'll have to assess the ratings

impact of these measures over the medium

term so you would judge not a move into

these sort of you know wartime financing

measures if I can broadly call it that

but the exit from them more yes so we'll

have to evaluate what the exit strategy

is after this passes and you know it

would normally be a concern so what

Indonesia is doing by purchasing bonds

on the primary debt market that's

tantamount to monetary financing of the

deficit now as long as this is a time

bound program its thighs is capped and

there's it's put in the context of a

medium term strategy and exit we can

kind of see through that and we wouldn't

see it as having an immediate ratings

impact but those are a lot of ifs and

uncertainties and many of these central

banks are really embarking on

unprecedented measures which are called

for a time like this

but again we'll have to assess the

impact when we come out of this how do

you judge the extent of space policy

space available in Asia but also

specifically in India do you still see

room on the fiscal side but also on the

monetary side for adjustments as that

the growth picture was right so getting

back to this case it's really once again

something just to repeat myself that the

countries that had fiscal space going

into this crisis certainly have more

room for fiscal expansion and just to

give some examples develop markets like

Korea New Zealand Indonesia the

Philippines all went into this crisis

with low public debt ratios relative to

peers that they probably do have more

room on the other hand countries like

India Malaysia certainly Japan and the

more developed under the

at very high public debt ratios above

median peer rating levels going into

this so they have less room but you know

but we have to be careful what do we

mean by room I'm speaking here of

ratings room relative to peer medians

and what our ratings models show us in

terms of fiscal outcomes this will

scores downward pressure on the ratings

the question for policymakers in this

environment will really be can they

finance these larger deficits without

destabilizing debt markets without

undermining confidence and what it means

for medium-term exit strategies so

that's how we're thinking of the room

for fiscal space monetary space many

countries still have some room for

additional interest rate cuts inflation

just about everywhere is really low or

even negative in some countries so that

gives a bit of space to lower interest

rates in this environment especially for

central banks that have built up good

track records and credibility under

their inflation targeting frameworks

they can probably get away with some

more rate cuts we just saw the

Philippines last week cut by 50 basis

points and and markets have really taken

that in stride I have two last questions

that are steep and one is on the

financial sector I think you know

through your comments and through your

release as well you've reiterated the

pressure on the Indian financial sector

is one negative again

is that specific to India and is that a

longer lasting problem than just what

we're seeing right now levels of

capitalization governance etc – all of

that sort of fill in to the concerns you

have about the Indian financial sector

yeah what really concerns us about

India's financial sector sort of – two

factors one is is the sector going to be

strong enough after the crisis to

support credit flows and the investment

that's required to support a return to

that very strong medium-term growth that

we previously thought India was was

capable of over the medium-term if not

that could generate tight financing

conditions and hold back the strength of

recovery and all

Bentley medium-term growth the second is

that it does those contingent

liabilities for the government of

capital injections all of these things

eventually appear on the central

government's balance sheet so that's

something we take into effect and also

looking at the health of the

government's balance sheet my last

question Stephen is on the political

economy in India there was a rare

comment in your ratings release talking

about the focus of the ruling government

on the nationalist agenda which may

serve as a distraction from the anomic

reform implementation could you

highlight what prompted that comment

well I'd rather not focus on any

individual pressure point on the

political scene in India but what we're

referring to more broadly are the many

challenges that government the

government faces particularly in a

crisis like this with domestic social

pressures social tensions that come with

that some of the border conflicts of

international relations with neighbors

it's a lot to juggle at the same time

there's no sense that we don't think the

government is capable of doing that but

we were simply noting that that these

are additional challenges on the

government's plate in addition to

dealing with a health and economic

crisis at the same time fair enough see

if and I'll leave it at that

thank you so much it's been great but

you will get a deep understanding of

your perspective mostly from thoughts

with eight ratings thanks watching you

look great thank you



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