Fitch watches RP, Sri Lanka

Fitch

TWO Asian countries—the Philippines and Sri Lanka—will be under the watchful eyes of Fitch Ratings for potential “political shocks” that may occur in an election year.

Sri Lanka will hold its presidential and legislative elections within the first quarter, ahead of the May 10 national elections in the Philippines. Both emerging markets are currently rated below investment grade with a stable outlook. “In the Philippines, there are a number of presidential candidates, and it is too early to predict how the campaign will evolve,” it said, but “it appears that the presidential race in Sri Lanka will be contested by the incumbent and the former leader of the army, both of whom will be highlighting their roles in bringing the long-running civil war to an end.”

At this stage, however, Fitch said it “does not expect a sharp increase in political risk, but will monitor developments” in the two Asian countries.

This year, presidential and legislative elections are to be held in 14 emerging markets around the world, and all are to be monitored closely by the credit-rating agency.

“Based in part on the upcoming elections, Fitch forecasts fiscal improvements in both the Philippines and Sri Lanka will be modest in 2010, and dependent on cyclical revenue increases rather than spending cuts.”

The Philippine government is tipped to return to the offshore debt market with possible offers of dollar- or euro-denominated papers, and a samurai bond issue ahead of the May elections.

Fitch expects sovereign international bond issues this year to reach a total of $66 billion, fewer compared with last year’s estimated volume of $74 billion, the highest level since 2005. The projected figure this year includes total offers of $2 billion from the Philippines.

Indonesia and South Korea are also expected to be active in the international debt market this year with offers of $3 billion and $2 billion, respectively, according to Fitch.

Last week Finance Secretary Margarito Teves said that until the government has fine-tuned its borrowing program in relation to the new budget-deficit figure projected for this year—P293 billion—it was keeping its external borrowing program at $3.8 billion for the whole year.

In its latest report, Fitch said 2010 is likely to see the sovereign credit profiles of emerging markets remaining “stable” despite some ongoing uncertainties and risks. A “gradual rebalancing between positive and negative rating actions” is also expected and the gap between stable and negative outlooks has, in fact, already begun to narrow.

However, the agency said, “the scope for political shocks that could undermine macrofinancial stability cannot be wholly discounted, especially against the backdrop of quite a busy 2010 election calendar.”

In 2009, only two countries in the so-called Emerging Asia (EM)—Mongolia and Thailand— suffered rating downgrades from Fitch, reflecting the risks to the countries’ financial and political stability.

In its report on Asian borrowers in 2009, Fitch noted there were no major sovereigns that were downgraded, though Korea was on negative outlook until September as it sought—successfully —to stabilize its banking sector, which had borrowed heavily offshore in recent years.

“Though Asian economies suffered a severe output shock as a result of the collapse in global trade, the stabilization of global trade and finance, turnover in the inventory cycle and the continuing strength of the Chinese economy, supported by aggressive fiscal and monetary/credit easing, [have] powered a strong regional economic recovery from the second quarter,” it said.

But though international debt issuance by sovereigns had increased, it said the primary source of fiscal financing has been from the domestic markets.

The corporate sector in EM, Fitch noted, had also been able to increase its domestic borrowing significantly in response to much tighter external credit conditions in the first half of the year.

In the Philippines, around P300 billion was raised by corporate-debt issuers through the domestic market—a record volume and twice the size of the previous year—as borrowers took advantage of the prevailing low interest rates and the abundantly liquid market.

However, Fitch said EM domestic debt markets for corporations and banks remain relatively underdeveloped in comparison with advanced economies, hence the greater reliance of the nonsovereign sector on international capital markets and foreign bank flows.