Fitch flags ‘deteriorating’ Asia-Pacific outlook
Asia-Pacific sovereigns are contending with a deteriorating credit environment as limited fiscal space leaves governments more vulnerable to the prolonged economic fallout from the Middle East war, Fitch Ratings said.
In a report, the major debt watcher downgraded its 2026 sector outlook on Asia-Pacific sovereigns to “deteriorating” from “neutral,” saying the conflict has heightened risks to economic growth, inflation, financing conditions and public finances across the region.
The revision comes as many Asia-Pacific economies remain heavily dependent on imported oil, gas and related products such as fertilizers, much of which pass through the Strait of Hormuz.
“Fiscal and external pressures, and policy responses will be key to determining the impact of the US-Iran war on APAC credit profiles,” Thomas Rookmaaker, head of Asia-Pacific Sovereigns at Fitch Ratings, said.
“Fiscal space has diminished materially over the past seven years, and some governments now face significant spending pressures on top of already higher expenditure on defense and household support to mitigate discontent over the high cost of living,” he added.
Fitch noted that some countries, including the Philippines, have allowed domestic fuel prices to rise alongside global oil prices, a move that could slow consumption, push inflation higher and prompt faster monetary tightening.
By contrast, countries that have kept energy prices broadly stable still saw their fiscal pressures increase as governments absorb their rationing measures.
“Most APAC sovereigns have limited fiscal space to respond to the shock, reflected in a higher median government debt-to-GDP ratio of 50.5 percent in 2026 from 37.8 percent in 2019, and still-larger fiscal deficits for more than 70 percent of sovereigns,” Fitch said.
Against this backdrop, Fitch said the number of Asia-Pacific sovereigns carrying negative outlooks had already risen to five, including the Philippines.
The Philippines’ outlook was lowered to “negative” from “stable” in March, placing its investment-grade “BBB” rating under greater scrutiny and further dimming hopes of securing the coveted “A” rating.
A negative outlook signals that the sovereign rating could be downgraded within the next 18 to 24 months. If such a move materializes, it would mark the Philippines’ first sovereign rating downgrade in more than two decades.
