THE outlook for sovereign creditworthiness in the Asia-Pacific region is negative despite a preliminary peace deal between the US and Iran, Moody’s said on Thursday.
Energy prices will likely stay high despite the peace deal, the debt watcher noted, leading to faster inflation, weaker economic growth and tighter financial conditions.
Economies that are heavily dependent on oil imports and limited financial buffers will see increased fiscal and external risks, Moody’s added, and supply chain adjustments and the adoption of artificial intelligence (AI) will in the near term not offset the impact of high energy costs.
Risks will be most pronounced for emerging markets in South and Southeast Asia that depend heavily on energy imports, while economies that can leverage AI-related exports are expected to be relatively resilient.
Pakistan and Vietnam are the emerging markets that rely the most on oil from the Middle East, with imports from the region accounting for over 80 percent of total oil and gas purchases.
Among the region’s advanced economies, Taiwan was noted to be the most heavily reliant, with nearly 100 percent of its oil and gas imports coming from the Middle East.
The Philippines, meanwhile, was noted to source about a quarter of its oil and gas from the region.
Moody’s said it had not changed its Asia-Pacific growth forecasts, which remain at 4.0 percent for 2026 and 3.8 percent for 2027, but added that outlooks for several individual economies had been lowered to take into account their dependence on energy imports and sensitivity to inflation.
Among the region’s G-20 economies, growth forecasts for India, Japan and Australia were lowered but that for China remained unchanged, while in South Asia the outlooks for the Maldives, Bangladesh, Pakistan and Sri Lanka were cut.
In Southeast Asia, Moody’s also lowered its forecasts for the Philippines, Indonesia and Thailand.
“In the Philippines, limited subsidies and high pass-through to domestic prices will erode real incomes and dampen consumption, while investment remains subdued amid the ongoing flood-control probe,” the ratings firm said.
A table in Moody’s report showed that the Philippines had the biggest growth forecast reduction of over one percentage point since the start of the war in the Middle East.
In April, Moody’s cut the country’s growth projection to 4.9 percent from 5.5 percent previously, below the 5.0- to 6.0-percent target for 2026.
Technology-oriented economies such as Korea, Taiwan, China and Vietnam were tagged as being better placed to withstand higher energy prices, and forecasts for Vietnam and Malaysia were also said to have been moderately increased due to exports of AI-related goods.
“In Southeast Asia, we expect nominal growth and government fiscal policy choices to help contain debt levels in Indonesia and the Philippines, although risks to growth and the fiscal outlook are increasing,” Moody’s said.
“In Indonesia, the government has maintained significant fuel subsidies despite high oil prices, increasing the risk of breaching its 3-percent fiscal deficit ceiling. By contrast, the Philippines has no broad-based fuel subsidies and high domestic pass-through, which limits the fiscal burden but dampens economic activity and risks heightening social tensions,” it added.
“In addition, for both countries, tighter monetary policy to manage inflation and support currencies will gradually worsen debt affordability as borrowing costs rise.”
As for AI adoption, Moody’s noted that India and the Philippines, which have large business process outsourcing industries, could potentially use AI to automate routine tasks.
“However, low labor costs may delay substitution and reduce incentives for rapid investment in initiatives to enhance investment,” it added.
