China’s credit rating outlook was downgraded by Moody’s on Wednesday, premised on weak fiscal metrics, a fall in reserve buffers and uncertainty about the government’s ability to implement reforms.
Moody’s Investors Service lowered the outlook to ‘negative’ from ‘stable’, while affirming the government bond ratings.
The sizeable foreign exchange reserve buffers give the authorities time to implement reforms and gradually address imbalances in the economy. This underpins the decision to retain its Aa3 rating, Moody’s said.
Explaining the rationale for assigning a negative outlook, the agency said the fiscal strength is expected to diminish further, albeit from very high levels.
Although a significant portion of contingent liabilities is unlikely to crystallize on the balance sheet in the short term, their existence and increase in size reflect economic imbalances.
The government debt is forecast to rise to 43 percent by 2017 from an estimated 32.5 percent in 2012. Nonetheless, debt affordability is set to remain high as large domestic savings fund government debt.
Further, foreign exchange reserves of China declined markedly to $3.2 trillion in January.
Reserves remain ample but their decline highlights the possibility that pressure on the exchange rate and weakening confidence in the ability of the authorities to maintain economic growth could fuel further capital outflows.
Moreover, allowing reserves to fall to preserve the currency exchange rate when pressures exist would tighten liquidity condition. At the same time, preserving forex reserves and allowing a sharp depreciation of the currency would likely fuel further capital outflows.
The agency cited risks of a loss in policy credibility as the third driver for outlook downgrade. Without credible and efficient reforms, China’s GDP growth would slow more markedly, the agency cautioned.
The rating outlook could be revised up to ‘stable’ if the agency concluded that government policy was likely to succeed in balancing competing priorities and thereby arrest the deterioration in China’s fiscal metrics.
The material has been provided by InstaForex Company – www.instaforex.com