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MADRID,
Spain—The United States recession and high inflation are
some of the major factors cited by international
credit-rating agency Standard & Poor’s (S&P) that could
dampen growth and downgrade credit ratings in the
Asia-Pacific region.
According to its latest publication “Where to From Here?
Standard & Poor’s View On Credit Trends in
Asia,” S&P said
that “from a short-term perspective,” the region will
remain resilient and have the ability to grow even if
the rest of the world economy is in trouble.
This
ability proceeds from the “growing integration” that
contributes to the region’s “ability to insulate itself
from the macroeconomic turbulence in the US.
Notwithstanding this, however, there are some visible
threats in the region in the form of food and energy
prices, which may adversely affect performance over the
next couple of years.”
For the
Philippines, S&P said the country’s gross domestic
product (GDP) is likely to be within the range of 5.3
percent to 5.8 percent in 2008 and 5.1 percent to 5.6
percent in 2009.
Inflation in the country, on the other hand, is
projected to be within the range of 3.4percent to 3.9
percent in 2008 and 3.8 percent to 4.3 percent in 2009.
S&P
believes rising inflation and slowing growth will prove
to be a big challenge for governments because political
stability is closely related to institutional
effectiveness, as well as quality, timing and efficacy
of policy responses. “The current slowing world growth
and the simultaneous steep rises in inflation present
many governments with an uncomfortable choice, and their
response could ultimately influence credit
fundamentals.”
S&P
termed high inflation brought on by high food prices,
particularly of wheat and rice, as the new “bogeyman”
for governments, replacing high oil prices; and
characterized it as a real danger especially in
low-income countries where it gives the political
opposition the ability to topple government.
In
addition, should governments survive political turmoil
from soaring prices, the new “bogeymen” place
significant financial burdens on their budgets due to
heavy fiscal losses from efforts to mitigate
prices—measures like export bans, reduction of import
tariffs and increasing food subsidies.
This,
the agency said, will hold true particularly for
countries where 50 percent of household expenditures are
allotted for food expenses and where there are large
fiscal or external imbalances. All these could lead to
credit downgrades, particularly for those on weaker
footing such as Fiji, Sri Lanka, Papua New Guinea and
Pakistan.
But S&P
believes that financial innovation accompanied by
greater transparency will help support the region’s
economic growth.
For the
Philippines, S&P’s rating is at BB-with a Stable B
outlook. This is due to the fact the political risk is
not that high in the country and does not display
explicit credit constraint.
The
agency noted that the Arroyo government has not been
largely affected by a difficult political environment
characterized by multiple coup attempts and impeachment
raps hurled at President Arroyo.
However,
S&P said policy risks continue to be the country’s
“enduring weakness.” This, unfortunately, opens the
administration to continued political instability.
“Further reforms necessary to boost revenue gains and to
cement fiscal consolidation could be ensnared in
domestic political wrangling. By prolonging one of the
major credit weaknesses of the sovereign, its narrow
revenue base, such policy risks could negatively affect
the ratings.”
In a
statement, S&P Asean region managing director Surinder
Kathpalia said the growth of innovative financial
products in Asia is in their early stages and may still
be tapped to facilitate the flow of capital in the
region as well as maintain economic growth rates.
“Financial market innovations that are already well
established in developed markets can help boost economic
growth in
Asia. Examples include project finance for infrastructure,
derivatives markets for hedging and corporate finance,
ratings and indices for Islamic finance, and small- to
medium-sized credit assessment,” said Kathpalia.
Kathpalia cautioned that transparency and sound risk
management must be observed to make financial
innovations work properly.
S&P
corporate & government ratings in
Asia managing director Ping Chew said that most financial
innovations possess hidden risks that require a “trial
and error” period and to reap the benefits of financial
innovation, countries must develop a robust risk
management framework and limit associated costs.
“In many
markets in Asia, basic tenets of financial markets are
absent, which includes adequate information disclosure
and transparency. The role of credit rating agencies is
to provide an independent, objective assessment on
credit risk,” Chew said.
The S&P
executives did not mention their role in the collapse of
the highly innovative subprime lending in the United
States, the blame for which many economists said they
must share.
Arthur
Levitt, the former chairman of the US Securities and
Exchange Commission, had asserted that “the
credit-rating agencies suffer from a conflict of
interest — perceived and apparent — that may have
distorted their judgment, especially when it came to
complex structured financial products.”
Frank
Partnoy, a professor at the University of San Diego
School of Law who has written extensively about the
credit-rating industry, says that the conflict is a
serious problem. Thanks to the industry’s close
relationship with the banks whose securities it rates,
Partnoy says, the agencies have behaved less like
gatekeepers than gate openers.
Last
year, Moody’s had to downgrade more than 5,000 mortgage
securities — seen as tacit acknowledgment that the
mortgage bubble was abetted by its overly generous
ratings. Mortgage securities rated by Standard & Poor’s
and Fitch have suffered a similar wave of downgrades. |
