S&P: Euro debts, global slump to affect RP, Asia ratings

The ratings of countries in the region, including the Philippines, are threatened as a result of weaker-than-expected global growth, sovereign debt concerns in Europe, and potential tightening in funding conditions, credit watchdog Standard & Poor’s Ratings Services said in a report.

The report, titled “Asia-Pacific Sovereigns: Is The Positive Rating Trend On Hold?”, said the weaker global conditions, combined with domestic inflation and specific weaknesses in some sovereigns, could slow the pace of upgrades for some Asia-Pacific sovereigns (Indonesia and Sri Lanka) and could result in negative rating actions for sovereigns with already weak balance sheets at their rating levels.

Asia-Pacific sovereign ratings have bucked the global trend so far in 2011 with two upgrades (Indonesia and Fiji) to one downgrade (Japan) but several sovereigns in the region face a potential global recession with higher debt burdens and weaker budget positions than what they had in 2008.

“In some cases, the weaker balance sheets are due to the fiscal stimulus measures employed to offset the previous global slowdown,” Standard and Poor’s credit analyst Kim Eng Tan said.

“In others, it was due to the cost of natural disasters adding to fiscal pressures. In the Cook Islands, Japan, Malaysia, New Zealand and Vietnam, net general government debt levels have risen significantly in the past few years partly for these reasons.”

Aside from the growing risk of slower external demand, Asia-Pacific sovereigns are also facing inflation due to higher food and commodity prices.

“Central banks are now caught between the need to tighten monetary policy to head off an increase in inflationary expectations and the need to support the economy through lower interest rates,” Standard & Poor’s credit analyst Elena Okorotchenko said.

International wholesale funding markets have started to show signs of strain, S&P added.

The rising cost of interbank US dollar borrowing is one indication. If a serious liquidity squeeze recurs in the near future, it could affect Asia-Pacific sovereigns that depend on external funding or those with financial systems reliant on offshore markets.

“Most sovereigns in the region, however, are in a strong position to meet the possible downturn,” Okorotchenko said.

A number of governments have improved their balance sheets and strengthened their external positions during past periods of strong economic growth.

Partly for this reason, we maintain a stable outlook on 16 of the 22 foreign currency long-term sovereign ratings in the region, Okorotchenko added.