S&P says risk buffers sufficient for now

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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 nine-year-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 export-oriented economies will be “more at risk” from an all-out trade war and increased protectionism.