Fallout from US Fed action feared

The US Federal Reserve’s tapering of asset purchases and possible interest rate hike as early as March could leave economies with high debt and wider budget deficits like the Philippines vulnerable to refinancing risks.

In a press briefing on Friday, United Nations Economic and Social Commission for Asia and the Pacific (Unescap) economic affairs officer Shuvojit Banerjee said monetary tightening by the US Fed would attract capital flows back to developed markets, hence a challenge to developing economies if outflows would be as sharp as the so-called “taper tantrum” in 2013.

“Definitely, countries will have to be concerned about and deal with this risk,” he said.

Another risk to economic recovery in the region was debt distress, Banerjee said, as sovereign borrowings have gone up amid the prolonged COVID-19 pandemic. He nonetheless said debt levels in the region had remained “decent.”

In a report last week, the Organization for Economic Cooperation and Development (OECD) noted that “while sovereign debt levels have increased over the last decade in Asian emerging markets, in line with a global upward trend, sovereign debt-to-GDP (gross domestic product) ratios in emerging Asian markets in 2020 are lower than the average ratio of advanced economies.”

In the case of the Philippines, faster debt accumulation than the revert to economic growth from the recession in 2020 jacked up the debt-to-GDP ratio to a 16-year-high of 63.1 percent in end-September 2021, above the 60-percent level, which debt watchers deemed as manageable for emerging markets.

But the OECD said in its “Financial Market Developments and Conditions in Asia” report that “interestingly, sovereign debt-to-GDP ratios in the Philippines, Thailand, Vietnam, Bangladesh, Indonesia and Cambodia are lower than the global average of emerging economies.”

Debt accumulation

But the OECD warned that “sovereign debt accumulation and gross financing needs will expose emerging Asian economies to abrupt changes in the risk appetite of investors.”

“Continued large borrowing needs combined with weakening global growth and logistical hurdles in procuring and distributing vaccines in some emerging Asian economies as well as the possible emergence of new variants may result in rising rollover ratios and refinancing risk for many sovereigns in emerging economies,” the OECD said.

“These risks are compounded by the fact that 30 percent of the debt will be due over the next three years in several Asian emerging markets, including Pakistan, China, Mongolia, Bangladesh, the Philippines, Sri Lanka, Indonesia and Thailand,” it added.

The OECD said wider budget deficits could aggravate indebtedness. The Philippines had been projected to end 2021 with a record fiscal deficit equivalent to 8.2 percent of GDP, smaller than the programmed 9.5 percent but bigger than 2020’s 7.6 percent.

“Fiscal deficits are deteriorating in most emerging Asian economies in part due to the important borrowing since the COVID-19 crisis, particularly in China, India, Thailand and the Philippines. In addition, fiscal policy is set to remain accommodative in 2021 and 2022 in many regional economies, particularly in Vietnam, Bangladesh, the Philippines, Cambodia and Laos,” the OECD said. INQ