Moody’s flags weak peso’s credit risk

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By Melissa Luz T. Lopez
Senior Reporter

A SUSTAINED PESO depreciation would be “credit negative” for the Philippines as it pushes up the cost of foreign debt and triggers capital outflows, Moody’s Investors Service said.

The Philippine peso is among the Asia-Pacific currencies which have been hit the hardest by a stronger dollar, the debt watcher said, even as it noted that the region has been “susceptible” to foreign exchange fluctuations.

“For Indonesia and the Philippines, currency pressures will exacerbate already weak debt-affordability metrics and, to the extent that they are accompanied by capital outflows, may have wider repercussions for the balance of payments,” Moody’s said in a report published late Friday.

The peso is the second-worst performer among emerging market currencies as it depreciated by 5.2% year-to-date, according to Moody’s. This is second to the Indian rupee’s 7.2% depreciation and worse than the Indonesian rupiah’s 4.8% weakening as of May 24.

Of 18 sovereigns, only five have currencies that have so far appreciated against the dollar, namely: Mongolia, Thailand, Malaysia, China and Maldives.

Moody’s said this showed that the Philippine economy may face “greater credit challenges” as the local unit remains slumped against the greenback, especially after it touched P52.70 on Friday — its weakest performance in nearly 12 years.

Tightening financial conditions have also resulted in higher yields. The credit rater added that the peso has been “on a depreciating streak” since December as weaker remittance inflows and a wider current account deficit spook investors.

The Bangko Sentral ng Pilipinas (BSP) has attributed the wider trade gap largely to a surge in imports to support the local infrastructure boom, which should boost growth prospects and optimism for the economy in the long run.

Central bank officials also noted that the Philippines’ economic backbone remains solid and should allay investor concerns.

Outstanding foreign currency debt held by the Philippines accounted for more than a third of total obligations, the debt watcher noted. The country’s ability to settle these liabilities could weaken as a stronger dollar drove up their face value when expressed in peso terms.

At the same time, the global debt watcher noted that the “large” dollar reserves held by the BSP serve as a comfortable buffer against exchange rate-related shocks.

Gross international reserves stood at $80.062 billion in April, enough to cover 7.8 months’ worth of import payments. The ratio is well above the three-month international standard.

Despite region-wide currency depreciation, Moody’s analysts noted that current weakness is not as bad as in previous episodes.

“In all cases, however, the extent of depreciation and more generally, tightening in financing conditions, is nowhere similar in magnitude as in the taper tantrum in 2013, although it is 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 noted.

BSP Governor Nestor A. Espenilla, Jr. has said the central bank employs “tactical” interventions to temper sharp swings of the currency during day-to-day trading, but maintained that monetary authorities prefer to allow the exchange rate to be “market-driven.”