Hong Kong: Asia’s economy boosting spending spree will weaken national balance sheets across the region, with India, Vietnam and Malaysia most likely to suffer rating downgrades as their debt and fiscal deficit levels are already high.
Economy manager: Planning Commission’s Montek Singh Ahluwalia (right) announcing a second set of stimulus measures on 2 January. PIB
Credit markets, however, are not expected to punish governments for sharply ramping up spending on a temporary basis, as support from foreign exchange reserves and currency swap lines is much stronger than during the Asia financial crisis a decade ago.
Asian governments have announced a raft of stimulus programmes in recent months, estimated to range from 1% to 12% of their respective gross domestic product (GDP), to shore up their economies amid the global slowdown.
As governments try to spend their way out of the downturn, the immediate impact will be on fiscal deficits as cooling growth reduces government revenue. It could also mean higher borrowing requirements and an increase in their debt to GDP ratios.
Rating agencies are concerned about a rise in the proportion of fiscal deficit and debt to a country’s GDP because it affects the government’s ability to service and repay its debt.
“If this downturn is prolonged and deficits go up a lot more than expected, the ratings could be lowered,” said Kim Eng Tan, sovereign analyst with Standard and Poor’s. “This risk is for countries like India, Pakistan, Vietnam and Sri Lanka.”
India is aiming to prop its economy via measures such as interest rate cuts, lowering factory gate duties and rolling out extra spending. India’s growth is seen slowing to 7% this year, down from about 9% in each of the last three years.
Vietnam’s rating has a negative outlook from all three agencies despite its plans for $6 billion (Rs 29,220 crore) in stimulus, while bonds from Pakistan, which resorted to a $7.6 billion emergency loan from the International Monetary Fund (IMF) to avert a balance of payment crisis and a looming debt default, are on Moody’s negative outlook list.
Sri Lanka, which unveiled a $141 million stimulus package after economic growth slowed to a five-year low, saw its rating downgraded in December by a notch to B, five levels below investment grade.
But sovereign debt spreads will not react violently to downgrades which are sparked by higher fiscal deficits due to stimulus programmes, according to Viktor Hjort, credit analyst at Morgan Stanley. “I don’t see the agencies as a major market movers at this moment,” he said referring to spreads having tightened despite rating agencies expressing concerns about fiscal positions worsening due to stimulus spending. “Many (countries) are coming into this situation stronger than 10 years ago. Sovereign reserves and potential for external support in terms of US swap lines are much better,” Hjort said.
Rating agencies expect fiscal deterioration across Asia because of the political compulsion to support growth, but its impact on sovereign ratings will vary, depending on where a country is on the rating scale and how long the fiscal pressures were expected to last.
Moody’s Investors Service believes Japan, South Korea, China, Taiwan and Thailand—whose ratings range from the highest Aaa to A1, four notches below—can run large fiscal deficits but those lower on the rating scale do not have the same luxury.
“Those that have the weakest financial positions are those who can least afford to have large deficits, namely, Philippines and Indonesia,” said Tom Byrne, Moody’s regional credit officer, referring to their ratings which are four and three notches below investment grade, respectively.
Fitch Ratings also has concerns about ratings of countries where the fiscal gap may not shrink even when an economic recovery takes place.
“We would be worried about places like Vietnam, Sri Lanka, Malaysia and India, where it is likely the deficit will persist at higher levels,” said James McCormack, Fitch’s head of Asia-Pacific sovereign ratings.
Even so, analysts question the efficacy of economic pump priming measures, which are seen by some as largely political gestures by governments which want to be seen to be doing something in a crisis.
“These stimulus packages in Asia have limited ability to insulate the economies from the global recession,” said Byrne. “The government comprises a smaller portion of GDP in Asia compared with the rest of the world.”
Some nations faced physical limitations too.
“Many countries have administrative constraints, like lack of people and the relevant machinery, in getting major spending programmes implemented,” he said, adding that such problems could stand in the way of plans by Indonesia, the Philippines and Vietnam.
Indonesia’s government has proposed an economic stimulus package worth $6.32 billion and the Philippines aims to hit the higher end of its growth target with the help of what it calls $6.5 billion economic resilience plan.
It is increasingly becoming imperative for Asian governments to spend. “If you don’t spend now, that will lead to a more severe slowdown and that can have social implications and it could feedback in fiscal receipts,” said S&P’s Tan. “Longer term if the economy goes into a tailspin, it could become a structural problem.”