Governments and corporates accumulating large debts this year for pandemic programs are bound to suffer the negative consequence of expensive payments starting next year, Moody’s Investors Service said on Monday.
The scenario, in turn, threatens to further deteriorate the fiscal house of Asian economies, but most especially Indonesia, Sri Lanka and the Philippines where foreign debts accounted for over a third of total liabilities.
“Through 2021, we project a worsening in debt affordability, as measured by interest payments as a share of revenue, driven by higher debt-servicing costs associated with the large increases in debt as governments ramp up stimulus spending amid simultaneously large declines in revenue,” Moody's said of these countries.
Asian governments where budgets have typically been tight binged on debt this year to ensure cash continue flowing while they control the spread of pandemic. For now, a weak dollar is cutting costs of these obligations, and making borrowing more affordable.
But the debt watcher warned the party may be over as soon as the calendar shifts. Once annual interest payments start falling due early next year, a strong currency may no longer help governments that embarked on hefty fund raising this year.
The peso, considered one of Asia’s best performing currencies this year, has appreciated 4.4% against the greenback as of Monday from end last year, but this is largely due to low imports that cut demand for dollars. A sudden rebound on shipments may therefore weaken the peso and increase debt costs.
“For sovereigns whose foreign-currency liabilities comprise a large share of total government debt, a weaker dollar could lessen debt servicing costs on existing foreign-currency exposures in local-currency terms,” the credit rater said in a report.
“For example… the Philippines could potentially reap significant savings from the weaker dollar. However, the deterioration in fiscal metrics resulting from the pandemic shock more than offsets the potential benefit,” it added.
Companies in these Asian territories, which likewise sourced dollar financing, would face similar budget hurdles. Banks, which already face massive losses from unpaid loans from their customers, are at risk of cash struggles next year because of taking in more debt.
“Some banks in Singapore, Thailand, and Philippines have already taken advantage of the weaker US dollar and low interest environment to issue dollar-denominated bonds to shore up their capital and secure longer-term financing at lower rates,” Moody’s said.
“While prolonged dollar weakness would be positive for issuers of dollar-denominated debt, it would weigh on the profit margins of companies with significant US dollar revenue,” it said.
The Duterte administration itself has repeatedly countered calls for bigger stimulus with the need to keep its fiscal house in order. That, however, did not stop officials from signing numerous multilateral and bilateral loans to the tune of $9.9 billion as of October 2 to fund the costly pandemic response.
Overall, gross borrowings hit P2.56 trillion from January to September, Bureau of the Treasury data showed.
“A depreciation of the US dollar against local currencies would improve debt-servicing ability for companies that have US dollar debt exposure but do not have natural hedges from US dollar revenue or use of financial hedges to protect against currency risk,” Moody’s said.