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Singapore. Rebounding stock markets and an improving credit situation are among the encouraging signs that the worst may be over for Asia-Pacific economies, Standard & Poor’s said on Tuesday.

But the US-based credit ratings company warned that the road to recovery was fraught with challenges as countries still face weak demand for their exports and government stimulus packages put a strain on fiscal balances.

“The worst of the economic dislocation in Asia-Pacific appears to be over, if recent indicators are to be believed,” S&P said.

It cited the recent strong performances of regional stock markets and a significant narrowing of the spread between the London Interbank Offered Rate and the overnight index swap rate.

The Libor-OIS spread indicates the health of credit markets, and its narrowing means that bank funding costs will come down, allowing easier credit to fund economic activity.

Other positive signs include “a partial recovery in commodities prices, the abatement of deflationary concerns and less risk aversion among investors,” it said.

But S&P cautioned that “fiscal deterioration resulting from stimulus and banking sector support measures will continue to put pressure” on the credit ratings of countries in the medium term.

“Steep declines in exports, especially in East Asia, have led to significant contractions in economic output,” S&P analyst KimEng Tan said.

“In the next year or so, corporate defaults will likely rise as a result. The pressures will mount on banking systems in the region, particularly those that are highly leveraged.”

Tan said the downgrading of the outlook for India and Taiwan from stable to negative reflected “the fiscal deterioration associated with providing support for their respective economies.”

Many governments around the world, including those in the Asia-Pacific region, have rolled out massive spending measures to stimulate their economies amid the global slump.

And one of those, Australia, saw business confidence jump in May by the most since 2001, adding to signs that governments’ stimulus splurges are working after the White House forecast 600,000 jobs would be created or saved in coming months.

Global economic data has started to improve, partly spurred by trillions of dollars of state spending in response to the recession. A survey from the OECD said its outlook declined at a slower pace in April, suggesting a bottoming out of the slump.

In a reminder that banks still sit on large amounts of toxic assets, the US Congressional Oversight Panel said on Tuesday that US bank stress tests should be repeated if unemployment rises beyond levels assumed by regulators in a recent round of examinations that provided relief to markets.

“We have some key global economic indicators due out later this week, including US retail sales, and if these confirm the growing impression that the global economy is improving, we’re likely to see the Nikkei shoot up through 10,000.”

In Australia, a monthly survey of more than 400 companies showed that its measure of business confidence jumped 12 points to minus two in May, with notable improvements in construction, manufacturing and wholesale.

While negative, it was the highest reading since February 2008 and, apart from wild swings that followed the Sept. 11 attacks, it was the biggest bounce since the series began in 1989.

Taken with a separate survey that showed job advertisements fell at the slowest pace in 13 months in May, the reading offered hope that Australia could remain one of the few developed countries to have escaped recession.

The weight of government spending by Japan to fight its worst recession since World War II has forced Tokyo to put off its long-term fiscal reform plan by 10 years, the Nikkei business daily reported on Tuesday.

Japan’s fiscal situation is the worst among the big economies, with the government saying that the ratio of its long-term debt to gross domestic product will climb to 170 percent by end 2009/10.

Reuters