Top Story

By Mikhail Franz E. Flores, Senior Reporter

Philippines seen among least at risk

Posted on October 01, 2015

THE PHILIPPINES appears least vulnerable to major risks that could darken the economic growth outlook and affect the sovereign credit scores of emerging markets, debt watcher Standard & Poor’s Ratings Services said in a new report.

In a Sept. 29 report, titled: “Who’s at Risk? Emerging Market Sovereigns are Facing Adverse Global Trends,” S&P cited three risks on the growth prospects of 22 emerging economies: capital outflows from developing to advanced markets once the Federal Reserve hikes interest rates, unwinding of domestic credit built up in recent years and China’s economic growth slowdown.

Among 22 markets it assessed, the Philippines and two others led the pack as the least vulnerable to these three key risks. “The least-vulnerable sovereigns in our ranking are the Philippines, Poland, and Mexico, followed by Pakistan and Hungary. They have low direct economic ties to China, low risk of domestic financial leverage and are only moderately vulnerable to higher global interest rates (with the exception of Hungary),” S&P said in its report.

In contrast, Venezuela, Argentina, Turkey, Colombia and Peru were found the most vulnerable.

Degree of risk varies across economies.

S&P found the Philippines the least vulnerable to the Fed lift-off given a healthy external balance sheet and limited exposure to foreign currency debt. Higher global interest rates pose risks for countries that have accumulated much external debt in recent years. “Such countries are also likely to face high external financing needs, as measured against current account receipts and foreign exchange reserves.”

The Bangko Sentral ng Pilipinas said the country’s external debt stock declined by 4.6% to $75 billion last semester from $78.6 billion in 2014’s comparative six months. BSP said the decline from last year was due to the negative foreign exchange revaluation adjustments as the US economy continued to recover, fueling the dollar’s appreciation.

The Philippines was likewise found the fourth least vulnerable economy against deleveraging risk, when economies suffer a sudden loss of liquidity after a period of rapid expansion in domestic credit.

China’s slowdown finds the Philippines the 12th most vulnerable among the 22 economies tracked.

S&P said it is tracking these risks against the sovereign ratings of the 22 economies, although downgrades are unlikely to happen.

“We believe that over the past two decades the ratings on emerging market sovereigns have become more resilient to stress, in part because they have made significant progress in developing their domestic capital markets, increasing their external reserves, and making their monetary policy frameworks more flexible,” S&P said.

“Therefore, we do not expect a materialization of risks -- comparable to the crises of the late 1990s -- to lead to downgrades.”

Going forward, S&P said emerging markets have limited their vulnerability to external risks by implementing floating exchange-rate regimes, targeting inflation and developing capital markets.

“Over the years, the growth of domestic capital markets in many emerging economies allowed sovereigns, banks and private firms to lessen their dependence on external funding,” S&P said.

“Being able to borrow in the local currency -- increasingly at fixed interest rates and for longer maturities -- significantly reduced vulnerability to sudden spikes in interest rates and unexpected movements in the exchange rate.”

The national government has been adjusting its financing mix increasingly in favor of local borrowings in order to limit the country’s exposure to foreign exchange fluctuations. The government plans to borrow P674.8 billion next year, 5% lower than the P710.8 billion adjusted program this year, according to the 2016 Budget of Expenditures and Sources of Financing. Bulk of next year’s borrowings will be sourced locally with an 85-15 financing mix compared to this year’s adjusted 75-25 ratio.