Quantitative Easing a `Key Theme' for Developed Sovereign Risk, Fitch Says
Quantitative easing in developed countries is a “key theme” for credit risk in emerging markets, Andrew Colquhoun, head of Asia-Pacific sovereign debt at Fitch Ratings, said today at a conference in Hong Kong.
Nations where monetary and fiscal discipline are weak and whose economies have strong links to the dollar are the most vulnerable, he said. Indonesia’s shallow capital markets and inflation explain why it still has a BB+ debt rating as its bond risk falls, Colquhoun said. Sri Lanka and India also have a history of volatile consumer prices, he said.
“This whole topic of the implications of quantitative easing globally is going to be the key theme for developing sovereign risk and sovereign ratings for the next 12-18 months,” said Colquhoun. “It could start to look bleaker than it does to some people now” in Indonesia if markets remain volatile because of capital flows, he said.
The costs of insuring against default on debt of Indonesia and the Philippines are now lower than that of Italy, which has a credit-rating six levels higher than either emerging-market nation. The price of insuring Asian debt has dropped amid record demand for emerging-market bonds as investors wager those economies will drive the global recovery, while Europe wrestles with surging budget deficits and sluggish growth.
Credit-default swaps on Italy, the only borrower among Europe’s so-called peripheral nations not to suffer a cut in its credit rating since last year, trade at 166 basis points. That’s more than the 131 basis points for Indonesia, or the 129 basis points for the Philippines, according to data provider CMA.
“The market is right to be pricing them better,” Robert Subbaraman, chief economist for Asia excluding Japan at Nomura International Ltd. in Hong Kong, said at the conference. “The risk is that fundamentals in Indonesia and the Philippines could start to deteriorate because of too much money flooding in.”
Inflation is a growing threat because of accelerating economic growth, commodity-price increases and rising housing costs, he said. Indonesia’s consumer prices climbed 5.8 percent from a year earlier in September, less than the 8.6 percent average rate for the past five years. Those in the Philippines gained 3.5 percent, compared with a five-year average of 5.3 percent.
Alicia Garcia-Herrero, chief emerging-markets economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong, said asset bubbles are a greater risk as Asian nations hold off from raising interest rates to quell currency gains.
The Bank of Thailand may refrain from a third straight increase in interest rates tomorrow, according to 13 of 19 economists in a Bloomberg News survey. Policy makers in South Korea and Malaysia have stopped raising rates.
The World Bank today lowered its outlook for growth next year in China and across East Asia to 7.8 percent from an April estimate of 8 percent, saying officials in the region need to curb inflation and ward off asset bubbles to avoid a repeat of the Asian financial crisis.
Fitch raised its rating for Indonesia in January to the highest non-investment grade. Fitch’s assessment of the Philippines is at BB, two levels below investment grade.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
A record $40.5 billion has flowed into emerging-market bond funds this year, more than four times the full-year high of $9.7 billion in 2005, according to data from research firm EPFR Global. Indonesia, with a budget deficit of 1.5 percent of gross domestic product, grew 6.2 percent in the second quarter from a year earlier, while the Philippines, with a budget gap of 2.2 percent of GDP, expanded at an annual rate of 7.9 percent.
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