MANILA, Philippines - Even if the global recession is to extend longer than expected, Standard & Poor’s (S&P) said the Philippines would fare relatively well although the impact on the country’s debt profile could trigger a credit ratings downgrade.
S&P said the possibility of an extended recession scenario is remote but if the US economy contracted by five percent this year and continued to decline in smaller increments until 2012, debt profiles would change significantly across Asia.
S&P was quick to point out that its simulations were not actual projections of credit ratings actions but merely tested what would emerge should the global recession fail to turn around by 2010 and last longer until 2012.
“The alternative scenario considered in this exercise sees most of Asia going through four consecutive years of economic contraction,” S&P said in a report entitled “Fiscal Health Of Asian Sovereigns If ‘Green Shoots’ Wither.”
S&P said the exceptions were China, India, Indonesia, and Vietnam, where government spending and private domestic demand are projected to keep growth positive through the period.
“The Philippines also fares relatively well in this scenario, emerging from a negative growth in 2011,” S&P said, showing that in the event of a five-percent contraction in the US economy, the country’s gross domestic product (GDP) would decline by 3.5 percent this year before turning (GDP) around in 2011 to grow by 0.7 percent and by 2.5 percent in 2012.
“We consider the likelihood of this extended-recession scenario to be remote,” S&P said but if it happens, the pressure on public finances from bailing out preferred corporates and banks would also be higher than in the base-case scenario of a quick recovery.
According to S&P, public finance would be hard hit, particularly in the economies where sustained economic contractions are expected. Revenue shortfalls and expenditure pressures are likely to be large and would require the government to take on heavier debt burdens.
S&P said that financially constrained Indonesia and Philippines are expected to chalk up smaller deficits of two percent to four percent of GDP a year and possibly experience rising debt burdens from a deteriorating currency or higher reliance on external financing.
“Under an extended-recession scenario, we assume that a significant share of the fiscal shortfalls would have to be financed externally,” S&P said. “For this reason, public sector external debt of Indonesia, Vietnam, and the Philippines would increase materially.”
In addition to budget financing, S&P said the Philippine government might decide to borrow externally to boost a reserve cushion or intervene in support of its currency.
“Confidence-sensitive currencies, such as in Indonesia and the Philippines, are expected to come under pressure in this scenario, potentially leading to external borrowing for balance-of-payments support,” S&P said.
Indonesia and Philippines, both rated ‘BB-’, might be downgraded by one or two notches, S&P said.
“Debt ratios could go back to the levels of four to five years ago, which would still be broadly consistent with their current ratings,” S&P said. “However, larger-than-assumed exchange rate movements could change these debt burdens sharply, as has occurred in past crises.”
The resulting deterioration in external positions could then push ratings of these countries into a lower category.