S&P: No need to push panic button on emerging markets

MANILA, Philippines — The sovereign credit ratings of emerging market countries including the Philippines continue to be relatively stable over periods of stress amid potential liquidity problems brought about by rising global interest rates and the market turmoil, according to S&P Global Ratings.

In a recent report titled “When the credit cycle turns: Do not push the panic button on emerging market sovereigns,” S&P said emerging market countries have undertaken reforms over past decades to strengthen their creditworthiness, improving their economic structure and reducing their vulnerability to a potential drop in global liquidity.

 “We expect our sovereign ratings on those countries to be relatively stable over periods of stress,” the debt watcher said.

It added the increased pace of normalization of its monetary policies in central banks of advanced economies led by the US Federal Reserve over the last year signal the end of an era of cheap money and herald a growing risk of negative developments in emerging markets.

“This has resulted in capital outflows from many emerging market countries, putting pressure on their currencies to depreciate, raising local interest rates, lowering local asset prices, and dampening gross domestic product growth,” it said.

The average sovereign rating of 22 emerging market countries is within the investment-grade rating category of around BBB- with stable outlooks.

 “These rating trends indicate that many governments have implemented difficult structural reforms and other policies that have improved the effectiveness of monetary policies, created greater exchange-rate flexibility, developed domestic capital markets, and improved economic growth prospects, boosting investor confidence,” S&P said.

It said many years of fast GDP growth have strengthened the economic resilience of emerging market sovereigns.

For one, the per capital GDP of the Philippines has more than doubled from 1998 to 2017 on the back of vibrant growth in the service sector.

S&P also expects most of the 22 emerging market countries to operate a current account deficit starting this year, while the combination of a net external debt position and a current account deficit makes sovereigns vulnerable to adverse external developments, such as rising financing costs.

“However, the stable outlooks on most of those sovereigns reflect our view that they have other credit strengths that give them financial and policy flexibility to manage external challenges according to their rating levels,” it said.