S&P says risk buf­fers suf­fi­cient for now

Business World - - Front Page - By Melissa Luz T. Lopez Se­nior Re­porter

THE PHILIP­PINES and other emerg­ing mar­kets have enough buf­fers to cush­ion the blow of ris­ing in­ter­est rates, slower global growth and weaker cur­ren­cies, S&P Global Rat­ings said.

The debt watcher said not all emerg­ing mar­kets will see a fund­ing crunch sim­i­lar to that buf­fet­ing Ar­gentina and Turkey, not­ing that re­forms in­tro­duced in re­cent years have made coun­tries like the Philip­pines more re­silient to ex­ter­nal shocks.

In a re­port, S&P said re­cent in­creases in global in­ter­est rates led by the United States and “mar­ket tur­moil” have raised con­cerns about pos­si­ble liq­uid­ity prob­lems among emerg­ing mar­kets, but it pointed out that such pes­simism is mis­placed.

Emerg­ing mar­ket cur­ren­cies in­clud­ing the peso have come un­der pres­sure over the past month amid con­ta­gion risks due to Turkey’s fi­nan­cial crisis, which saw a huge sell-off of the lira and prompted a risk-off ap­petite to­wards sim­i­lar mar­kets. The Ar­gen­tinian peso also plunged in April as the cur­rency reeled from a stronger dol­lar, do­mes­tic in­fla­tion and higher in­ter­est rates.

“We do not think that credit prob­lems will spread to the emerg­ing mar­ket as­set class as a whole,” S&P said in a re­port pub­lished on Thurs­day.

“A large num­ber of emerg­ing mar­ket coun­tries have un­der­taken re­forms over past decades to strengthen their cred­it­wor­thi­ness, im­prov­ing their eco­nomic struc­ture and re­duc­ing their vul­ner­a­bil­ity to a po­ten­tial drop in global liq­uid­ity. We ex­pect our sov­er­eign rat­ings on those coun­tries to be rel­a­tively sta­ble over pe­ri­ods of stress.”

The US Fed­eral Re­serve has been tight­en­ing pol­icy, trig­ger­ing cap­i­tal flows from emerg­ing economies back to the US and prompt­ing other cen­tral banks to keep up with their own rate hikes.

Lo­cal as­set prices have con­se­quently de­clined while cur­ren­cies have started to de­pre­ci­ate ver­sus the dol­lar. S&P said these de­vel­op­ments could hin­der ac­cess to liq­uid­ity, weigh on eco­nomic fun­da­men­tals and po­ten­tially “lead to lower credit rat­ings” for some emerg­ing mar­kets.

How­ever, S&P an­a­lysts said they “do not foresee an im­mi­nent and high risk of con­ta­gion” from Ar­gentina and Turkey, not­ing that other emerg­ing economies have boosted safe­guards to “re­duce their vul­ner­a­bil­ity” to tighter global money sup­ply con­di­tions.

“Most of those sov­er­eigns have higher rat­ings to­day than in past pe­ri­ods of fi­nan­cial tur­moil,” the credit rater said, not­ing that re­cent re­forms have made mone­tary pol­icy more ef­fec­tive, al­lowed greater ex­change rate flex­i­bil­ity, deep­ened do­mes­tic debt mar­kets, im­proved growth prospects and boosted in­vestor con­fi­dence.

“Many EM sov­er­eigns have pur­sued poli­cies to strengthen the pro­duc­tive struc­ture of their economies and di­ver­sify the sources of growth, thereby re­duc­ing their ex­ter­nal vul­ner­a­bil­ity to the cur­rent risk of tight­en­ing global liq­uid­ity.”

The Philip­pines has held a “BBB” rat­ing — a notch above min­i­mum in­vest­ment grade — with a “pos­i­tive” out­look from S&P since April. A “pos­i­tive” out­look means the credit rat­ing it­self may im­prove over the next two years. The econ­omy is seen to grow by 6.7% this year, lower than the gov­ern­ment’s 7-8% tar­get though still among the fastest in the re­gion.

S&P an­a­lysts say the Philip­pines stands on solid ground, partly on “the strength of steady in­bound re­mit­tances from Filipinos work­ing abroad, which have im­proved both the cur­rent ac­count balance and GDP growth, con­tribut­ing to a ris­ing credit rat­ing.”

Re­duced reliance on for­eign bor­row­ings has slashed the gov­ern­ment’s ex­ter­nal debt bur­den, sim­i­lar to the cases of Indonesia and Thai­land.

The peso has been trad­ing at P54:$1 over the past month while in­fla­tion surged to a fresh nineyear-high 6.7% in Septem­ber.

The Bangko Sentral ng Pilip­inas has raised rates by a to­tal of 150 ba­sis points so far this year to rein in in­fla­tion ex­pec­ta­tions and tem­per peso volatil­ity.

Across rated emerg­ing mar­kets, credit pro­files have “im­proved sub­stan­tially” and re­main sta­ble, S&P said.

At the same time, it flagged that credit qual­ity of ex­por­to­ri­ented economies will be “more at risk” from an all-out trade war and in­creased pro­tec­tion­ism.

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