Capital flight seen hiking borrowing costs

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.