Peso depreciation negative for Phl — Moody’s

The continued depreciation of currencies against the dollar is credit negative for countries with large external funding needs including the Philippines, Moody’s Investors Service said.

In its latest Asia Pacific report titled “Currency depreciation will weigh on sovereigns with high external funding needs,” the debt watcher said. Emerging markets and some frontier sovereigns including India, the Philippines and Indonesia are the hardest hit by currency volatility.

These countries are experiencing significant pressures reflecting a fall in

capital flows primarily driven by global factors like a strengthening US dollar and higher oil prices, it said.

In the Philippines, the peso has been depreciating since December on the back of a widening current account deficit due to infrastructurerelated imports and weaker remittance inflows.

Yields also edged higher, but by less than 40 basis points since mid-May compared with the 80 basis points increase in Indonesia since the start of the month.

“Foreign exchange pressures have been most pronounced in the key Asian emerging markets of India, Indonesia, and the Philippines. In some countries, including Indonesia and the Philippines, tightening financing conditions have also manifested in higher yields,” Moody’s added.

However, the rating agency said the extent of depreciation and more generally, tightening in financing conditions, are nowhere similar in magnitude as in the taper tantrum in 2013, although comparable to episodes of market stress in the second half of 2015 when there were fears of a China slowdown and the period after the US elections in late 2016.

The debt watcher warned further currency depreciation and rising yields would diminish debt affordability for both the Philippines and Indonesia that have relatively high foreign currency debt levels of 37 percent and 40 percent, respectively.

Owing to a low revenue base, debt affordability in both countries is already weaker than the 8.2 percent median for Baa-rated sovereigns.

Moody’s said high foreign investment participation in the capital markets have and will likely continue to amplify the effects of general emerging market risk aversion.