Moody’s: PH economy to weather Fed tapering

Debt watcher Moody’s Investors Service sees overall credit quality across Asia, including the Philippines, remaining healthy beyond the end of the US Federal Reserve’s tapering next year, even as it cautioned the region against market disruption risks.

“We expect the credit quality of Asian sovereigns, financial institutions and non-financial corporates to remain resilient to changes in US monetary policy, as the narrative shifts from Fed tapering to increases in policy interest rates in 2015,” read a Moody’s special comment titled “After The Taper: Frequently Asked Questions on Asian Credit and US Monetary Policy,” issued on Sept. 10.

“Asia’s low reliance on external funding, policy space to deal with external shocks and export orientation toward a strengthening US economy will all be credit positives,” it added.

The Philippines, having a Baa3 positive rating, is among the majority or 18 of the 22 economies in the Asia-Pacific that have stable outlooks in terms of credit fundamentals, which for Moody’s indicates steady credit conditions over the next 12 to 18 months.

As of this month, the US Federal Reserve had slashed its extraordinary monthly asset purchase program to a mere $25 billion, comprised of $15 billion in US treasuries as well as $10 billion in mortgage-backed securities, according to Moody’s. Previously, it hit a high of $85 billion in November last year.

But in general, “Asia’s overall sovereign creditworthiness should remain resilient to US interest rate tightening under our base case, largely for the same reasons displayed during the tapering process,” Moody’s said.

Post-tapering, the United States is expected to put in place “less accommodative” monetary policies next year.

Low external vulnerabilities as well as policy credibility across Asian economies are “sufficient” safeguards that would shield the region from credit or macroeconomic shocks, Moody’s said.

It pointed out that the banking sector, in particular, is well-positioned to be resilient due to generally strong capitalization on top of limited exposure to offshore funding.

As for Asian corporates, most are expected to withstand the next round of Fed tapering effects, which includes foreign exchange volatility and tighter local credit conditions, Moody’s said.

However, the debt watcher also warned of “moderate risk exposure” in the Philippines, Malaysia and Thailand, although the risks may be “insufficient to provoke major sovereign credit distress even if global liquidity conditions were to sour significantly.”

Regionwide, “the potential remains for a more adverse scenario,” Moody’s said.

“There is a risk of renewed market turbulence in Asia next year if the withdrawal of US monetary stimulus were to have larger effects on capital flows than currently anticipated,” it explained.