Moody's flags high debt risks facing Asia-Pacific nations

The Hong Kong skyline.
The Hong Kong skyline. PHOTO: HONG KONG TOURISM BOARD

High debt levels and global financial linkages spell vulnerability for a number of Asia-Pacific nations, including Singapore, according to Moody's Investors Service.

This comes amid a marked fall in financial asset prices in the Asia-Pacific since the United States presidential election last month.

In a report released yesterday on "sovereign risk" - a reference to the credit standing of sovereign countries, Moody's noted that regional currencies have since depreciated against the US dollar, while equity prices have fallen and portfolio flows have reversed.

"If they last more than a few weeks, capital outflows or lower inflows will correspond to a tightening in domestic financing conditions for many Asian countries," the credit ratings agency said.

"For some, (it) could exacerbate difficulties in meeting their current account and external debt payment obligations."

Moody's pointed out that direct vulnerability to capital outflows is limited in the Asia-Pacific, though with a few exceptions.

SOVEREIGN RISK

If they last more than a few weeks, capital outflows or lower inflows will correspond to a tightening in domestic financing conditions for many Asian countries. For some, (it) could exacerbate difficulties in meeting their current account and external debt payment obligations.

MOODY'S REPORT

"In most of the region, foreign exchange reserves generally provide coverage for external debt repayments, current account deficits are narrow and government liquidity positions are robust," it said.

The countries in the region that face external liquidity challenges include Mongolia, Pakistan and, to a lesser extent, the Maldives, Papua New Guinea and Sri Lanka.

"Nonetheless, while the direct impact of tighter global financial conditions may be limited, sustained capital outflows or markedly lower inflows pose indirect challenges for economies with already high leverage," added Moody's. This is particularly so if the domestic authorities are constrained in their ability to use fiscal and monetary tools to offset the tightening impact of global financial conditions.

Markets such as Mongolia, Sri Lanka, Malaysia, Hong Kong, Singapore and Taiwan are the most vulnerable to the direct and indirect effects of sustained capital outflows, said the report. However, it noted that Singapore, Hong Kong and Taiwan have "fiscal space to buffer negative shocks".

Moody's sovereign rating for Singapore is "Aaa", with a stable outlook - putting the Republic in an elite group of countries given the top possible rating by all three major ratings agencies.

Moody's added that for mainland China, the scope to offset a tightening in financing conditions related to capital outflows is still ample, although sustained outflows would erode it. "Increased scrutiny by the Chinese authorities over fixed asset and financial investment abroad indicates their concerns about sustained outflows," it said.

A version of this article appeared in the print edition of The Straits Times on December 15, 2016, with the headline 'Moody's flags high debt risks facing Asia-Pacific nations'. Print Edition | Subscribe