Asian states are better placed to withstand the pressures that led to the 1997/98 Asian financial crisis, Standard & Poor's said on Tuesday, but rising government and corporate debt, mainly in domestic currencies, are a concern.
The global rating agency also said it expected China to make further efforts to cool its booming economy through more monetary tightening and allowing an appreciation of the yuan.
"Today most corporates have reduced their foreign currency debt exposure and most sovereigns have improved their external position," Terry Chan, director and credit officer for Asia Pacific at S&P, told a news conference in Hong Kong.
The 1997/98 economic meltdown led to a flight of capital, with stock markets plunging, asset prices falling and several Asian economies spinning into recession. Thailand, Indonesia, South Korea and Malaysia were particularly hit hard.
Since then, many Asian countries have cut foreign currency debt exposure or adopted hedging policies against exchange risk, the global rating agency said.
For example, Indonesia's foreign currency debt to gross domestic product (GDP) stood at 47 percent at the end of 2005, compared with 54 percent at the end of 1996.
Thailand's foreign currency debt to GDP was down to 31 percent at the end of 2005 from 60 percent at the end of 1996.
"This favourable position reduces the risk of the sudden withdrawal of foreign currency funds leading to pressure on domestic exchange rates as in the case of the 1997 crisis," it said in a report entitled Asia 1997 Retrospective.
But S&P said it was concerned about the increase in overall leveraging by Asian governments and companies.
"As a share of GDP, general government indebtedness of all 10 sovereigns is higher than it was a decade ago," the report said.
"Weaker sovereign credit profiles raise concerns that these sovereigns have reduced financial flexibility should a financial or banking crisis, however unlikely, eventuate."
It said in a separate report that Asia faced tougher global conditions ahead.
"We do see global conditions still largely supportive of Asian economies, although conditions are a little less benign than in the beginning of the year," said Ping Chew, director of S&P's sovereign and financial services ratings.
The rating agency expected growth in the U.S. economy to slow to 2.3 percent in 2007 from 3.4 percent in 2006. The United States is Asia's biggest export market.
In addition to a likely U.S. slowdown, high oil prices and the "elevated interest rate environment" were a threat to growth in Asia, Chew said.
"With the weaker economic outlook, the upgrade momentum will slow compared with the last 30 months," he added, referring to credit ratings.
Chew said China would allow the yuan to appreciate as part of its measures to rein in the economy.
China raised interest rates on Aug. 18 for the second time in four months. It has also twice increased banks' required reserves in a bid to slow economic growth that raced along at 10.9 percent in the first half of this year.
"We predict a 3 to 5 percent appreciation for the full-year 2006," he said, adding that was just an assumption.
The yuan <CNY=CFXS> has appreciated a further 2.11 percent since it was revalued by 2.1 percent to 8.11 per dollar on July 21, 2005, and freed from a dollar peg to float within managed bands.