Capital flight seen hiking borrowing costs

High rates to slow down Asean growth


Capital flight from Asian economies may result in a significant increase in borrowing costs, which could lead to slower growth across the region, debt watcher Standard & Poor’s said.

In a report released this month, S&P also warned that growth prospects of economies in the region might start to weaken much more than the firm had earlier expected, leading to a deterioration in credit-worthiness of some countries.

“Governments that had warily allowed foreign capital into their economies not so long ago now worry about a sharp reversal of these flows,” S&P said in a report. “Sovereign credit fundamentals, including growth prospects and financial soundness, may also weaken more than we anticipate now,” it added.

S&P’s warnings come amid the recent volatility in financial markets caused by fresh speculation on the tapering of the US Federal Reserve’s bond-buying program.

Minutes of the latest Fed meeting showed most top American monetary officials agreed that US treasury and bond purchases would have to be reduced from the current rate of $85 billion a month. This bond buying program, introduced in late 2009, has kept US interest rates low, pushing investors to emerging markets in search of higher yields.

This trend is expected to reverse as the bond-buying program slows down and US interest rates start going up.

“Most sovereigns are likely to see economic growth weighed down somewhat by modest-to-moderate increases in funding costs,” said Standard & Poor’s credit analyst Kim Eng Tan.

S&P said that in most economies, the entry of foreign capital helped to sustain relatively high investment rates, improving economic growth.

“But improved conditions in the euro zone and the US could lead to slower capital inflows or outright outflows,” Tan said. “If capital inflows slow much more than we expect, the cost of financing may unpleasantly surprise borrowers.”

However, S&P said countries like the Philippines that enjoy healthy current account surpluses would likely fare better than countries with current account deficits.

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  • carlcid

    Higher interest rates will become the new normal. It’s already happened in the last 2 months, as 10-year U.S. Treasury notes have jumped almost one percentage point. One percentage point may not sound like much, but when it jumps from 1.8% to 2.8%, that’s more than a 55% increase in interest rates. 10-year Treasury notes are used as the predictor for the direction of interest rates.

    When the Fed let loose a flood of liquidity through quantitative easing, the whole world was awash with cash. Hot money looking for a place to go. The Philippines was one such destination. This phenomenon was going on for the past 6 years, and only culminated during the past few months. That is why the Gloria Arroyo administration also enjoyed a period of high growth and a buoyant stock and property market. And this phenomenon continued into the PNoy administration. This was true for most emerging markets.

    Unfortunately, PNoy attempted to construe the inflows of hot money as investor confidence in his administration, when it was actually just opportunistic forays by unscrupulous investors. Lately, the wind was taken out of PNoy’s sail, as the stock market has taken a hit, and will not be able to retrace its previous lofty heights for some time. The next shoe to drop will be the property market. After all, both stocks and property are highly dependent on the low cost of money.

    Now that the instant gratification conferred upon by a low interest regime is bound to fade away, there is need to show more actual accomplishments. It is not enough to depend on the old reliables, such as OFW remittances and BPO’s. Where are the PPP’s and the FDI’s that PNoy had been bragging about since he assumed office?

  • Weder-Weder Lang

    It’s probably too late for those that have relied heavily on foreign denominated loans in recent years. Not unless they’re revenue streams are also in dollars. The Lopezes learned their lesson the hard way in the late 90s and never regained their previous strength. As they say, it’s never too late until it’s too late.

  • joboni96

    tatakpan lang yan ng remittances
    ng mga ofw’s natin

    to fund mega projects and government loans

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