Profits of major Southeast Asian companies, including those in the Philippines, may come under pressure in the months to come as funding costs rise while earnings moderate, a new report of Standard & Poor’s showed.
Conglomerates across the region have taken advantage of low interest rates—a result of monetary and fiscal stimulus provided by governments around the world—to bankroll investments to expand operations and increase capacity. However, with global demand still tepid, yields from these new investments may shrink.
“Debt became cheaper and cheaper, helping fund hundreds of billions of US dollars in capital spending, and acquisitions in the region,” S&P said in the report.
“The mood, however, could well be changing soon,” it said.
S&P said funding in US dollars had been a popular avenue for companies to pursue aggressive expansion plans quickly and cheaply because US interest rates kept falling.
Confidence has also been high as the global financial crisis came to an end. Local currencies held firm against the greenback, and low funding costs more than made up for currency risks from the companies’ perspective.
Local-currency funding remained structurally more expensive in markets such as Indonesia, Malaysia, the Philippines or Vietnam, making the cost-benefit analysis in favor of US dollar financing “compelling.”
Aggregate outstanding foreign currency bonds for corporate sectors in Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam grew by nearly 120 percent to about $85 billion between 2009 and 2014, according to the Asian Development Bank online bond database. Outstanding foreign-currency bonds also nearly quadrupled in Indonesia and Thailand and nearly tripled in the Philippines.
The challenge for large companies is how to translate these investments into better revenue.
“Sizable spending by large companies in Southeast Asia has yet to translate into improved operating cash flows,” S&P said.
“We believe it will stay like this through 2016, given the tougher operating conditions, subdued consumer sentiment, and growing regional competition,” the firm said.
S&P said it expected the median credit ratios of the largest listed companies to further deteriorate in Indonesia, the Philippines and Singapore in 2015 if companies would maintain the same level of capital spending and dividends.
In those countries, tougher operating conditions, margin pressure, and lackluster revenue growth could exacerbate expanding debts from elevated capital spending, it said. Paolo G. Montecillo