Rising deficits threaten Asian ratings

Wednesday, 10 June 2009

Standard & Poor’s has sounded the alarm over the creditworthiness of some Asian countries, saying they are at risk of debt downgrades even if the global economy stabilises.

The credit rating agency said on Tuesday that sovereign debt ratings were coming under pressure because of huge economic and financial rescue packages announced by governments that have led to spiralling budget deficits. Recent fiscal measures to fight recession and stabilise banking systems would weigh on the public finances of several Asian economies, S&P said. Rising national debts would put credit ratings under strain.

“The worst of the economic dislocation in Asia-Pacific appears to be over, if recent indicators are to be believed, but fiscal deterioration resulting from stimulus and banking sector support measures will continue to put pressure on a number of sovereign ratings in the medium term,” said S&P.

The agency’s comments follow its recent decision to lower outlooks on India and Taiwan from “stable” to “negative”, a move that reflected the “fiscal deterioration associated with providing support for their respective economies”. Political unrest in Fiji, Sri Lanka and Thailand were also “important reasons for negative actions on sovereign ratings”, S&P said.

Its warning came as Fitch cut Malaysia’s long-term local currency rating from A-plus to A on worries over its growing budget deficit. Analysts estimated that the country’s budget deficit this year could be nearly 5 per cent of gross domestic product after it introduced M$67bn (US$19bn) in stimulus spending since November.

Philippine bond yields are also rising on fears of a bigger budget deficit as officials suggest they may have to return to the overseas debt market and tap concessional loans from multilateral lending agencies.

Margarito Teves, the finance secretary, has said lower tax revenues from a weak economy could force the government to raise its deficit target for a third time this year from $4.2bn.

But S&P said some countries, such as Australia, China and Hong Kong, could assume higher debt without a materially adverse impact on creditworthiness because of the relative strength of their balance sheets.

S&P also warned that the number of corporate defaults in the region this year could exceed those encountered in the 1997-98 Asian financial crisis. “In the next year or so, corporate defaults will likely rise” as “pressures will mount on banking systems in the region,” said Kim Eng Tan, an S&P analyst.

Courtesy: Financial Times