"In contrast to countries like Cambodia and Vietnam, India has the potential to emerge as a beneficiary of a tariff-driven shift in investment and trade flows. India may be subject to lower tariffs than many in APAC, which could help the economy attract further investment flows and support its development as a global manufacturing base," Moody's Ratings said in its outlook on APAC sovereigns.
The signing of the UK-India free trade agreement in May and ongoing efforts for a similar pact with the European Union (EU) will further back such development. However, the US goal to reshore select manufacturing segments could challenge the extent to which India benefits, it noted.
While negotiations will likely lead to some reduction in tariffs and other trade barriers on a bilateral basis, policy uncertainty is challenging investment decisions and disrupting trade in the region, the rating agency noted.
Trade policy uncertainty and a potential overhaul of global trade have raised cyclical and possibly structural credit risks in APAC, and economies like Vietnam and Cambodia, which benefitted from a diversification of investment and manufacturing out of China and now face high US tariffs, are particularly at risk, it observed.
Moody's also said that potential shifts in investment and trade flows stemming from tariffs will take years to materialise, and it is unlikely that multinational companies will make drastic investment changes while there is still significant uncertainty about the magnitude of tariffs and whether they will persist.
"Instead, companies will likely slow or pause ongoing investments while they wait for a steady state on trade policies to emerge. Even then, any decision to relocate manufacturing or product sourcing will take years to execute," Moody's said.
Keeping in view the weaker economic outlook, Moody’s Ratings expects the interest rate environment in APAC and globally to become more accommodative over the second half this year.
ALCHEMPro News Desk (DS)
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