Credit conditions in the Asia-Pacific region are projected to grow more volatile in 2025 due to uncertainty surrounding trade and foreign policies under the new U.S. administration, according to an S&P Global Ratings report. Titled "Credit Conditions Asia-Pacific Q1 2025: Bracing for Volatility," the report forecasts a deceleration in the region's economic growth coupled with escalating financial pressures.

The report emphasizes that the newly imposed U.S. tariffs on Chinese exports may negatively impact China's export-dependent economy. Eunice Tan, head of Asia-Pacific research at S&P Global Ratings, remarked: "A slower China and softer global trade will squeeze revenue and growth for export-centric Asia-Pacific."

Geopolitical Tensions and Energy Price Disruptions

 Ongoing geopolitical tensions and prolonged tariffs may destabilize energy prices and supply chains, adding further challenges for businesses. Firms that cannot pass increased costs onto consumers are expected to experience substantial margin pressures.

Asia-Pacific economies heavily reliant on trade, including Vietnam, Thailand, Malaysia, and India, face heightened risks from universal tariffs due to their sizable trade surpluses with the U.S. A global trade slowdown could reduce revenue and limit growth opportunities for the region's exporters.

According to the report, the region's overall growth rate is expected to fall to 4.2% in 2025, with a further decline to 4.1% in 2026. Although domestic consumption in emerging Asia continues to provide some support, external pressures significantly impact the broader economic outlook.

U.S. Trade Policy Shifts and Impact on Asia Pacific

Shifts in U.S. trade policy, including tariffs targeting Asia-Pacific economies, are expected to disrupt regional growth by pressuring export-driven markets like Vietnam, Thailand, and India. These measures could strain supply chains, reduce revenue streams, and amplify margin pressures. Coupled with slowing global trade, these challenges may weaken the region's economic stability and dampen overall growth prospects.

The trade policies of the incoming U.S. administration, referred to as "Trump 2.0," are anticipated to intensify economic difficulties. Increased tariffs on Chinese products could curb exports, dampen investments, and amplify deflationary pressures within China.

S&P projects China's growth to slow to 4.1% in 2025 and 3.8% in 2026, with additional challenges posed by unsold property inventory in lower-tier cities and limited fiscal support to boost domestic consumption.

Geopolitical Risks in the Region

Geopolitical concerns, including the ongoing trade tensions between the U.S. and China, could further destabilize the Asia-Pacific region, especially for export-reliant economies like Vietnam and India. The Russia-Ukraine war has already caused energy price volatility and disruptions in global supply chains, which may worsen as energy dependencies and trade routes are impacted.

Additionally, instability in West Asia, with issues like the conflict in Syria and tensions in the Gulf, could further disrupt energy supplies, especially for countries dependent on oil imports. These geopolitical risks, combined with rising tariffs, will exacerbate economic and credit challenges in the region.

Vulnerabilities in Emerging Markets

A resurgence of inflation in the U.S. could slow the Federal Reserve's monetary easing, keeping the U.S. dollar strong. This will pressure Asia-Pacific central banks to maintain higher interest rates to avoid capital outflows. Emerging market borrowers and heavily leveraged companies are at risk as access to offshore funding becomes more limited and costly.

Potential rate hikes by the Bank of Japan could heighten market volatility. Sudden changes in yen-based investments might reveal funding weaknesses for certain borrowers and increase interest costs for Japan's debt-laden economy.

Credit Rating Outlook and Volatility
By the end of November, the net rating outlook bias for Asia-Pacific issuers had already slipped to a negative 4%, compared to negative 2% in August. This shift reflects the mounting financial pressures and growing uncertainty in the region's credit markets.