Inflation, strong capital inflows threaten Asia-Pacific countries

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ISLAMABAD, Mar 23 (APP): Inflation has become or continues to be an important risk to macroeconomic and social stability in a number of countries in Asia Pacific, including Vietnam, Sri Lanka, India, Indonesia, Mongolia, Cambodia, Cook Islands, Fiji, Pakistan, and Bangladesh. This was revealed in a report titled "Asia-Pacific Sovereigns In 2011: Generally Stable Credit Quality; Inflation, Capital Flows Make Policy Environment Tricky. Issued by the Standard & Poor's Ratings Services, the report said the challenges of strong capital inflows and rising inflationary pressures bring in important credit risks. Domestic politics and increasing geopolitical risks further complicate policy decisions, it said. The ability of Asia-Pacific governments to navigate external and domestic challenges adroitly while pushing ahead with economic reforms will determine the pace of ascent in their credit ratings. "In our base-case scenario, strong growth will support credit quality in Asia-Pacific," said Standard & Poor's credit analyst Elena Okorotchenko Asia continues to outperform other regions in terms of growth and sovereign credit trends. The report said, despite generally stable credit quality, various factors have combined to make the policy environment tricky for sovereigns in the region, said in a report available here Monday. Economic growth will enable the public sector of high-income economies to reduce fiscal deficits and resume fiscal consolidation and allow emerging market governments to speed up structural reforms. But the downside risks to this scenario are growing beyond just a slower US economy or the eurozone debt woes. Food and energy price increases, the familiar bugbears, are providing a strong inflationary impetus across the board, and present low-income sovereigns in particular with difficult political and fiscal choices. In addition to inflation, a number of sovereigns, such as Indonesia, Thailand, and Korea, could be facing problems with capital flows, either as a result of large inflowsoutflows complicating exchange rate management or because of potential policy mistakes in trying to control such flows.