With Western economies forced to tackle hugh deficits, Asia's sovereign debt and macroeconomic fundamentals look good. The picture is in sharp contrast to 1997, when many regional governments ran larger fiscal and current account deficits than developed nations. According to last month's IMF World Economic Outlook, general government gross debt for G7 economies stood at 109.6 per cent of GDP, compared with 36 per cent for developing and industrialised Asia. HSBC's Andre de Silva believes Asian states moderately applied crisis stimuli and moderated the strain. The West overdid stimulus and 'are paying the price', he says, adding Ireland and Greece are in 'a debt and deflation trap'. Investors responded with yearlong inflows into emerging market debt - denominated in greenbacks and local currencies. 'It belies the increased confidence investors have in Asia's fiscal fundamentals,' says Asia strategist Manpreet Gill, at Barclays Wealth. Lombard Odier's St?phane Monier agrees, lauding the solidity of regional sovereign debt was aided by export-focused policies 'aimed at reducing currency volatility' and preventing 'strong appreciation in their currencies', coupled with strong foreign currency reserves. With lower debt levels, better fiscal discipline and a stronger growth outlook, 'Asian economies are well placed to support their sovereign debt issuance' - reflected in demand for local Asian bonds, he says. Assessing sovereign debt credit worthiness involves qualitative and quantitative factors. The former includes a country's political stability, the perceived effectiveness of its central bank and its ability to adapt to rapid economic change. The size and growth rate of GDP, and total debt and current fiscal deficits as a percentage of GDP are important figures to note. Fiscal balance numbers are the most important, Gill says. 'Other numbers would be the cost of outstanding debt and the currency risk of the debt.' Factors such as the pace of economic growth come into play when considering sustainability of outstanding debt, because 'a country growing at a relatively faster rate will have a greater ability to generate the necessary tax receipts to service its debt levels', Monier says. He suggests using a 'weighted sovereign benchmark' approach to determine each country's credit worthiness, and individual portfolio debt allocations, such as purchasing power parity adjusted GDP, to account for exchange rate fluctuations and provide an even scale for cross country comparison. Similarly, the fiscal balance to GDP ratio is useful to rank countries for fiscal discipline. It factors in 'strong or poor budget management realised in the previous year'. Likewise, the current account balance to GDP ratio grades each nation's ability to compete in the international market and attract capital. 'In many countries you also need to think about the total government exposure. For example, fiscal deficit numbers may only indicate the balance of federal government finances, but ... individual states or provinces' fiscal balances may be as important in the event of an implicit federal guarantee,' Gill warns. His concern is valid: earlier this month, analysts queried the transparency of Vietnam's government debt, which rose sharply to 56.7 per cent of GDP - up from 44.7 per cent last year. De Silva says overall Vietnam and Thailand look good. However, China and South Korea warrant an upgrade, according to Moody's. 'Asian countries have either a positive or stable outlook,' he says. Yet, all experts agree qualitative factors matter too because institutional investors desire quality governance and social harmony. 'Stability and effectiveness of public institutions is always a plus,' Gill says. Related to political stability is the national misery index - a measure of unemployment and inflation. Monier stresses political and social difficulties can 'impair a country's ability to formulate responsible fiscal polices', and countries with relatively higher misery should receive lower portfolio allocation. An ageing population over a 20-year span helps compare relative national fiscal and social challenges. 'Countries with higher old-age dependency ratios will receive a lower allocation,' Monier says. Higher yield and perceptions of improved quality are driving Asian bond demand. Even after large inflows this year, many emerging market government bonds offer higher yields than G7 bonds. However, Monier notes a diversified portfolio could benefit from 'equivalent rates in Indonesia of 8 per cent'. He believes currency appreciation will contribute healthy returns in emerging and regional markets, with estimated returns of a further 30 per cent over the next five years. Though Asian debt risk is larger than developed nations' debt, according to ratings agencies, 'the recent perception is Asian bonds carry lower risk than they did, say, a decade ago because of improved fundamentals', Gill says. He also believes using funds to invest in emerging Asian bond markets - rather than buying individual debt instruments - increases accessibility due to restrictions on foreign investors. 'Not all sovereign bond markets are open to all global investors, so funds are sometimes the only way of gaining exposure,' Gill says. Enhanced Investment Products' portfolio manager James Simmons agrees: 'As an individual retail investor, you must invest at least 100 million yen to enter the Japanese bond market, so you would need an already large portfolio.' He adds pooling resources with funds provides greater diversification. While few Asian sovereign bond exchange-traded funds (ETFs) with reasonable liquidity exist, their advantage is simplicity and the 'ability to gain wide exposure with one trade', Simmons says. While many have recommended buying emerging Asian local currency sovereign bonds since 2008, many prefer fund investments, Gill says. The value of the Hong Kong government's relatively small bond offering is tied to the local currency's link to a depreciating US dollar. Since the Hong Kong Monetary Authority is adamant the peg will remain, Monier advises investing in other Asian bond markets for higher yields and potential currency appreciation at 'an attractive level of return adjusted for risk'. He asserts Hong Kong bonds are unattractive because they are 'very low yielding [2 per cent for 10-year bonds], with bonds maturing in three years or more yielding less than US treasuries', coupled with a weakening greenback and a Hong Kong dollar unable to appreciate because of the peg. Actual yields on five-year US bonds recently turned negative and low interest rates have not kept up with inflation.