Asia-Pacific ratings hold firm

ASIA-PACIFIC sovereigns enter 2026 with resilience, even as global demand softens and trade growth slows for several export-orientated economies.

Investors and policymakers are looking ahead to the next year with cautious optimism, mindful of both the opportunities presented by new technology cycles and the persistent pressures of geopolitical and domestic challenges.

Fitch Ratings expects most Asia-Pacific sovereigns to remain resilient to subdued global demand, even with modestly lower gross domestic product (GDP) growth for some export-oriented economies.

The US tariff-related uncertainty is abating gradually, while some countries in the region will continue to benefit from a strong global artificial intelligence (AI) capital expenditure cycle.

According to Fitch Ratings, continued US dollar weakness and some central banks’ ability to cut rates amid low inflation will mitigate the impact of weaker non-tech exports, while several sovereigns – particularly investment-grade – have relatively strong external accounts with comfortable foreign exchange (forex) liquidity cushions.

The rating agency also highlights that policy responses to weaker prospects for non-tech exports, as well as subdued domestic activity in several jurisdictions, will determine the impact of these headwinds on sovereign credit profiles.

“Some governments have already raised spending to reduce public discontent and support households to alleviate the cost of living,” Fitch Ratings notes.

Recent violent protests in countries including Nepal and Indonesia could increase spending pressure further, underscoring the link between domestic political stability and fiscal strategy.

Resilient outlook

Most sovereigns in the Asia Pacific are on a “stable” outlook, Fitch Ratings notes, signalling some headroom to absorb the impact of weaker trade prospects.

Thailand, however, carries a “negative” outlook, reflecting growing fiscal risks amid prolonged political uncertainty and a delayed tourism recovery.

Fitch Ratings’ revision on Thailand’s outlook from “stable” in September 2025 cites growing risks to its fiscal metrics from prolonged political uncertainty as well as growth headwinds, including a delayed tourism recovery and household deleveraging.

China’s sovereign rating was downgraded to A from A+ in April 2025, a reflection of the rating agency’s expectation of continued weakening in public finances.

It said Beijing’s sustained fiscal stimulus will support growth amid subdued domestic demand and weak price pressures.

Trade remains a key determinant of growth for the region, especially with the United States as a major export market.

Higher US tariffs are likely to dampen import demand and slow Asia’s export growth in 2026, though strong base effects may temper the slowdown.

Fitch Ratings highlights that exports to the United States are particularly important – besides China – for Vietnam, Taiwan, Thailand, Hong Kong, Singapore, Malaysia and South Korea.

The agency anticipates world growth to fall slightly to 2.4% in 2026 from 2.5% in 2025, while expected US Federal Reserve rate cuts could allow some Asia Pacific central banks to ease monetary conditions.

Trade agreements and temporary pauses on US-China trade restrictions should provide some clarity for exporters.

“Greater clarity about the tariffs should strengthen exporters’ confidence in planning adjustments to their supply chains,” Fitch Ratings points out.

Tariff differentials within the region are relatively modest, and Asia’s manufacturing competitiveness remains a draw for investment, even with higher tariffs compared to countries outside the region.

India remains an outlier, with a 50% tariff and pending negotiations with the United States.

Technological advancement continues to be a growth driver.

Several economies are benefitting from strong trade and AI investment.

Leading suppliers of advanced AI chips in South Korea and Taiwan have ramped up production to meet demand, though growth in this sector is expected to moderate in 2026.

Fitch Ratings also highlights opportunities in rare earth mining, particularly in South-East Asia and Australia, though near-term growth impact is limited.

Notably, South Korea secured a reduction in US auto tariffs and assurances on semiconductor trade, measures that could influence its sovereign credit profile if forex reserves are affected.

Budget balance

Fiscal performance remains a central theme for sovereign credit outlooks.

Fitch Ratings expects narrower deficits or larger surpluses for roughly half of Asia Pacific sovereigns in 2026, though consolidation is generally modest and fiscal risks have risen.

Several governments have announced fiscal measures to support households and employment, including Indonesia, South Korea, the Philippines and Thailand, which could constrain debt reduction efforts.

Fitch Ratings projects the median government debt-to-GDP ratio in the region to rise to 50.1% in 2026 from 49.1% in 2025, with increases exceeding two percentage points of GDP for over a quarter of sovereigns.

High fiscal deficits and debt servicing costs remain rating constraints for several countries.

Fitch Ratings notes that high interest expenditure/revenue ratios, which it expects to fall in 2026 for only one-third of the sovereigns, form a rating constraint for Pakistan (46%) and Sri Lanka (49%) despite efforts to raise their revenue.

India (23%) and Indonesia (18%) also exhibit elevated ratios relative to peers.

Meanwhile, China continues to operate with high fiscal deficits but retains some headroom following its downgrade.

Higher-rated jurisdictions such as Hong Kong, Macao and Singapore maintain substantial fiscal buffers, while Taiwan and Turkmenistan benefit from low debt burdens.

Geopolitical risk remains heightened, even with the US-China trade truce in place.

Fitch Ratings warns that “heightened geopolitical risks will lead to higher defence spending, for instance in South Korea and Japan”.

Sudden flare-ups in longstanding conflicts, such as those between India and Pakistan or Thailand and Cambodia, underscore the unpredictability of such risks.

Domestic political pressures could intensify in 2026, following violent protests in 2025 that were largely driven by younger generations frustrated with corruption, cost-of-living pressures, and limited economic opportunities.

“Sovereign credit profile buffers and policy responses to incidents of unrest will be key for the impact on sovereign ratings,” Fitch Ratings highlights.

Elections next year could also influence credit outlooks.

Important votes in Bangladesh, Nepal, Thailand, and New Zealand are expected to have implications for fiscal policy and economic governance.

Fitch Ratings emphasises that policy responses, fiscal buffers, and domestic capital market depth will be crucial for determining sovereign resilience.

As Asia Pacific navigates 2026, the region faces a complex mix of trade, fiscal, political, and technological dynamics.

While growth prospects are modest and some fiscal pressures persist, strong external accounts, technological investment cycles and targeted policy responses may support sovereign credit profiles.

“Policy responses to weaker prospects for non-tech exports, as well as subdued domestic activity in several jurisdictions, will determine the impact of these headwinds on sovereign credit profiles,” Fitch Ratings highlights, signalling a cautious but measured outlook for the coming year.