The Context: Risk Groupings Political / policy risks Sharp global economic slowdown Drag on export and economic growth Risk of sharp correction in commodity prices Oil supply shock

Pakistan Political uncertainties have broken the trend of improving credit fundamentals and have raised borrowing costs. In the near term, economic and financial indicators are expected to remain healthy. Resumption of positive ratings trend depends on the successful transition to a new and stable government as well as the new government’s willingness to continue the pragmatic approach to economic policies.

India Large domestic economy shields India from the impact of potential global economic slowdown. Turnaround in net external indebtedness, together with some fiscal consolidation, has strengthened credit support. Credit support could be strengthened further if sustained growth lifts India’s low per-capita income level significantly. This hangs on continued reform efforts. Political uncertainties, however, likely to result in an uneven pace of improvements.

The Commodities Producers…

Vietnam: Oil revenue employed to boost infrastructure A sharp fall in oil prices could affect the government’s ability to sustain its ambitious infrastructure investment program through its budget. Increased off-budget financing and greater use of PPP financing could offset this partially. Foreseeable fiscal deterioration unlikely to damage credit fundamentals sufficiently to trigger a negative rating action. Continued robustness of economic growth – a benefit of recent reforms – expected to provide credit support.

Indonesia Decline in government revenue resulting from lower oil prices to be partly offset by lower cost of fuel subsidies. Potential deterioration of fiscal position unlikely to move ratings in the near term. Structural reforms in recent years have helped growth to move up as global economic conditions improved. Further upward movements in sovereign ratings depend on sustenance of political stability and reform effort. Significant room exists for changes to effect a more conducive investment climate.

The IT/Electronics Exporters…

Singapore (AAA/Stable) Likely to be most affected by global slowdown in terms of decline in GDP growth Policy predictability and very strong financial reserves underpin credit ratings Malaysia (A/Positive) Impact would be significant and could trigger policies to support growth, in which case a deterioration of the fiscal position is likely Above average credit metrics expected to keep LT sovereign ratings within the ‘A’ category in the near term

Thailand Policy missteps of post-coup government has not yet affected credit metrics materially thanks to healthy exports and strong external asset position Export slowdown will lose the economy its sole source of growth, which may not be offset by a domestic demand pickup if a stable new government is not formed as anticipated.

Philippines Sharp drop in electronics exports likely to have significant impact on economic growth. However, credit fundamentals remain strong enough to maintain the Philippines in its ratings in the near term in the event of a global slowdown. Positive policy moves of recent years have brightened economic growth prospects and restored fiscal stability. Substantial improvements in sovereign creditworthiness depends on continued political stability and the persistence of economic reforms.

China Export slowdown expected to have a greater impact than in 2001, when economic growth hardly budged. Domestic demand growth likely to remain strong and could be reinforced by even more infrastructure spending if necessary. Inflationary pressures, currently driven by food prices, could become more broadbased. Central bank tightening began in earnest. Clear results of the economic and financial reforms in terms of deepening marketisation of economy to determine ratings changes.

Hong Kong Strong economic performance, sound financial sector as well as ample fiscal and foreign exchange reserves place Hong Kong above most ‘AA’ peers in credit strength. Main rating constraints remains the lower ratings on mainland China. In the short term, ratings trends to mirror China’s ratings.

Focus on Taiwan

Sovereign Ratings Considerations Factors that have been important in sovereign defaults: Political / policy risks Economic structure and growth prospects Fiscal risks: Budget performance Debt burden Contingent liabilities Monetary stability External position Balance of payments performance External debt burden

Taiwan (AA-/Negative/A-1+) Main short-term risk is a deterioration of cross-straits relation in the lead-up to Taiwanese Parliamentary and Presidential elections Key structural weakness in the Taiwan credit story is the government’s weak fiscal position. Government debt burden is relatively high and, until recently, fiscal deficits add to this burden.

Taiwan (AA-/Negative/A-1+) Banking sector risks in Taiwan in line with systems where governments are similarly rated. However, domestic credit is much larger as a share of GDP than in the these peers. Consequently, in the event of a post-boom banking system distress, the damage to public finance in terms of the contingent liability to government is higher. Less risky More risky

Taiwan (AA-/Negative/A-1+) Per-capita income in Taiwan is also lower than in other “AA-” economies. However, faster per-capita GDP growth means that the gap is closing. Higher trend growth likely if economic relationship with mainland China is strengthened significantly. However, domestic politics an impediment.

Taiwan (AA-/Negative/A-1+) As with most of its peers, a very strong external creditor position reduces vulnerability of the financial system to large shocks. Improvements in budget performance and relative debt burden suggest that fiscal position has eased with tax changes. Resolution of political uncertainties and a further improvement on the budget front in 2007 are key events.

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