Asian corporates face higher financing costs

MANILA, Philippines - Asian corporates face higher financing costs for expansion plans as the recent financial market turmoil underscored the fast-growing region’s vulnerability to sell-offs, an investment bank said yesterday.

“In the context of weak global growth and stalling demand from China, falling asset values and rising funding costs are likely to hit capex plans, particularly in Southeast Asia,” Barclays said in a report.

Capital expenditures or capex pertain to firms’ spending to boost production and expand businesses. The British lender said at this early, capital goods imports have already turned “negative” for Indonesia, Thailand and the Philippines.

“These economies showed double-digit growth in capital goods imports in 2012,” it explained.

The three nations were among the worst hit by a slump in the financial markets for the past two weeks after investors became worried of pronouncements the US will withdraw its stimulus measures this year.

As a result, capital flight was observed in regional financial markets after investors became optimistic US interest rates will rise soon. By Barclays estimates for instance, the Philippine Stock Exchange index (PSEi) lost 16.5 percent of its value so far this year.

The PSEi, one of the world’s best performers, has since recovered some lost ground, rising 1.31 percent to 6,549.88 at the end of morning trade yesterday.

In the local bond market, meanwhile, 10-year bond yields have risen by 128 basis points, “underlining the change in market sentiment.”

Large sell-offs were likewise true for the rest of Southeast Asia, where “growth has been strong in the past two years,” Barclays said.

“The prospect of capital outflows seems to have triggered some sense of panic among domestic and foreign investors, leading to weaker (foreign exchange) and higher funding costs,” it pointed out.

With higher borrowing costs, Barclays warned the region’s stellar economic performance may no longer be repeated this year as a capex slowdown could lead to sluggish investment.

Investment spending, it said, may also “fall further given bleak global growth” that could affect importation of capital equipment. Official data showed merchandise imports rose 7.4 percent in April, the first expansion in four months.

The local economy grew 7.8 percent in the first quarter, the fastest in the region, as capital formation - led by public and private investments - surged while consumption remained firm.

Government figures showed capital formation jumped 47.7 percent in the first three months of the year versus last year. Public construction went up 45.6 percent, while its private counterpart rose 30.7 percent.

On Friday, Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo reiterated the Philippines remains well-equipped against capital outflows with huge buffers in place and ready to be deployed if needed.