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Philippines among nations facing debt service shock next year – Moody’s
MANILA, Philippines – Governments and companies that accumulate large debts this year for pandemic programs are likely to suffer the negative consequences of expensive payments starting next year, Moody’s Investors Service said Monday.
The scenario, in turn, threatens to further deteriorate the fiscal house of the Asian economies, but especially in Indonesia, Sri Lanka and the Philippines, where external debts represent more than a third of total liabilities.
“Through 2021, we project a worsening in debt affordability, as measured by interest payments as part of revenue, driven by higher debt service costs associated with large increases in debt as governments increase debt. Stimulus spending amid concurrent large revenue declines, “Moody’s said of these countries.
Asian governments, where budgets have generally been tight in debt this year to ensure that cash continues to flow while controlling the spread of the pandemic. For now, a weak dollar is lowering the costs of these obligations and making loans more affordable.
But the debt watcher warned that the party could end as soon as the calendar changes. Once annual interest payments start to come due early next year, a strong currency may no longer help governments that embarked on a big fundraiser this year.
The peso, considered one of Asia’s best performing currencies this year, has appreciated 4.2% against the dollar as of Monday since late last year, but this is largely due to low imports that reduced demand for Dollars. Therefore, a sudden spike in shipments could weaken the peso and increase debt costs.
“For sovereigns whose foreign currency liabilities comprise a large portion of total government debt, a weaker dollar could reduce debt service costs on existing foreign currency exposures in local currency terms,” said the evaluator of credit on a report.
“For example … the Philippines could potentially get significant savings from a weaker dollar. However, the deterioration in fiscal metrics as a result of the pandemic shock more than outweighs the potential benefit, ”he added.
Companies in these Asian territories, which also obtained financing in dollars, would face similar budgetary obstacles. Banks, already facing massive losses from unpaid loans from their customers, are at risk of cash problems next year due to incurring more debt.
“Some banks in Singapore, Thailand and the Philippines have already taken advantage of the weak US dollar and the low-interest environment to issue dollar-denominated bonds to shore up their capital and secure longer-term financing at lower rates,” Moody’s said. .
“While prolonged dollar weakness would be positive for issuers of dollar-denominated debt, it would affect profit margins for companies with significant US dollar revenues,” he said.
The Duterte administration itself has repeatedly responded to calls for greater stimulus with the need to keep its fiscal house in order. However, that didn’t stop officials from signing numerous multilateral and bilateral loans to the tune of $ 9.9 billion as of Oct. 2 to fund the costly response to the pandemic.
Overall, gross loans reached P2.56 trillion from January to September, data from the Treasury Office showed.
“A depreciation of the US dollar against local currencies would improve debt service capacity for companies that have exposure to US dollar debt but do not have natural hedges of US dollar income or the use of financial hedges to hedge against currency risk, “Moody’s said.
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