S&P says RP less vulnerable to Greek crisis

DESPITE a significant amount of foreign debt, the Philippines is less vulnerable to external investor sentiment turning sour as a result of Greece’s fiscal crisis, according to Standard and Poor’s (S&P).

In a research note, S&P said the lesser vulnerability of the Philippines to Greece’s debt problems stems from the large share of Manila’s foreign-currency-denominated bonds in the hands of local investors, and the small share of peso-denominated bonds in the hands of non-residents.

The international credit rating firm said the Philippines’ external liquidity was supported by more than $15 billion in annual overseas Filipino worker (OFW) remittance inflows, which helped boost the Bangko Sentral ng Pilipinas’ (BSP) dollar reserves.

Data from the BSP showed that the country’s gross international reserves already hit the $47-billion mark at end-April.

“This makes the Philippines somewhat less vulnerable to shifts in external sentiment,” S&P said.

The rating firm also said that the Philippines, along with Indonesia, “have nearly completed their external funding requirements for the year.”

“So, unless market interest rates for Asian borrowers rise and remain at elevated levels over many months, we believe that these two sovereigns shouldn’t be affected much,” S&P said.

Another factor contributing to the Philippines and Indonesia’s lesser vulnerability to the Greek fiscal crisis is the bullish sentiment investors hold for emerging markets such as the two vis-à-vis developed markets, the rating firm said.

“This is due to their stronger growth prospects, better demographics, lower government debt burdens, and adequate external liquidity,” S&P said, adding that the “combination of these factors is likely to maintain capital flows into Asia.”

Even if global risk aversion rises, the rating firm said the presence of net exporters of capital among major Asian economies would serve to limit any capital flight as “part of their funds could be pulled back to Asia and reinvested within the region.”

Having said the above, S&P said the Philippines and Indonesia’s reliance on external borrowings make them vulnerable to foreign sentiment, especially since the “main channel of contagion is likely to be through higher funding costs.”

“Governments and companies in Indonesia and the Philippines may have to pay higher interest rates,” the rating firm said.

S&P further said that if the current situation will lead to a wider economic slowdown in Europe, then Asian exports and inbound foreign direct investment could also be hurt.

It said that Asian governments with healthy finances – such as China, Singapore, Hong Kong, Korea, and Thailand – can temper the impact of a foreign trade slowdown through fiscal pump-priming.

The rating firm however was silent on the Philippines’ fiscal position.

Philippine economic managers expect the government’s budget deficit to hit P293 billion, or 3.2 percent of gross domestic product (GDP) this year.

While it ruled out any “immediate impact on Asia sovereign ratings from the unfolding events in Europe,” S&P nonetheless admitted that “specific idiosyncratic risks may be driving Asia sovereign ratings down [or up] in the near future.”

In January, the rating firm affirmed its below-investment grade “BB-” senior unsecured debt rating on the Philippines, with a stable outlook, which means no rating action is likely in the next six months to a year. –LAILANY P. GOMEZ REPORTER, Manila Times