No direct Brexit impact on Philippine credit rating – Fitch

MANILA, Philippines - The decision of the United Kingdom to leave the 28-strong European Union (EU) (Brexit) would have no immediate direct impact on the ratings of sovereigns and banks in the Asia Pacific region including the Philippines, Fitch Ratings said yesterday.

“The spike in political uncertainty in the UK – and resulting effects on investor risk appetite – could pose the greatest challenges for Asia in the short term. If protracted uncertainty has a sustained effect on investor and consumer confidence, the resulting tightened liquidity conditions and pressure on emerging capital markets could weigh on growth in the region,” Fitch said.

The debt watcher said the growth in more trade-integrated economies such as Singapore, Taiwan, Hong Kong and Korea would be affected if there is protracted uncertainty.

However, the debt watcher said it remains far from clear that such a sustained market reaction would develop.

It explained some of the negative “risk off” market moves that occurred in the immediate aftermath of the Brexit vote have already been partly unwound this week.

Furthermore, Fitch added Asian market reaction has been far more muted than in Europe.

Fitch said the potential for developed market central banks to act such as the US Federal Reserve slowing the pace of its interest rate increases also played a key role in calming markets.

The rating agency said the direct impact from UK trade on Asian economies including the Philippines would also likely be limited.

The UK is the world’s fifth largest economy. Asian countries’ exports to the UK equate to less than one percent of gross domestic product (GDP) and account for less than 3.5 percent of total exports.

Fitch expects a slowdown in short-term GDP growth as a result of the referendum.

“But over the long term, it is also possible that a UK outside the EU may be able to make quicker progress on trade liberalization with Asian countries than as a member of the EU,” it said.

Only Korea currently has a free trade agreement with the EU.

Fitch also said the direct financial linkages are limited as well and so the risks are more indirect to Asia’s banking systems.

Data showed emerging Asia accounts for less than 15 percent of the total external claims of UK banks.

“Singapore and Hong Kong, as offshore financial centers, are more significantly exposed relative to the size of their economies, but these are mainly local or regional claims from UK subsidiaries and unlikely to see significant withdrawal as a result of Brexit,” Fitch said.