Philippine gov’t seen withstanding shocks from unexpected interest rate hikes

• May 25, 2021

MANILA, Philippines — The Philippine government is best placed to handle shocks from a rise in interest rates, likely making debt refinancing less of a problem for the state in the next few years.

In a report sent to journalists on Tuesday, S&P Global Ratings said its baseline forecast is for government spending on interest payments —as a share of the Philippines’ gross domestic product — to stay at 1.9% this year until 2023.

In the event that borrowing costs increase by 100 basis points, the debt watcher said results of its stress test showed the state would still pay the same interest as a proportion of GDP in those years. Even under a worst-case scenario that rates would spike by 300 bps, S&P said interest expenditure would be unchanged at 1.9% until 2023. This is because, S&P said, the government borrows more onshore than offshore.

“(O)ther emerging-market borrowers — Brazil, China, India, South Korea, the Philippines, and South Africa — finance themselves almost exclusively in local currency, giving them greater control over their cost of funding,” S&P said.

On the other side of the spectrum, S&P said 4 out of 20 of the emerging markets included in its report would see at least a 1-percentage point in interest costs by 2023 under a 300-bps rate shock scenario. In the case of Egypt, Ghana, and South Africa, it would be twice that.

Meanwhile, nearly all developed sovereigns should be able to digest the first-round effects of even a 300-bps rise in refinancing rates on public finances, though Japan and the U.S. would likely respond by further shortening the maturity of their debt profiles to counter a surge in borrowing costs.

“What ultimately matters for sovereigns and their ratings is why rates rise: If they do so reflecting recovering growth and normalizing monetary policy, amid accelerating productivity, they will represent little threat to public finances,” S&P said.

“On the other hand, if rate hikes are aimed at choking off runaway inflation against a backdrop of stagnating productivity, the fiscal and ratings fallout could be substantial,” it added.

At a time the pandemic is prompting governments around the world to borrow more to fund their costly pandemic response, the Duterte administration continues to favor local debts. Treasury data showed that out of the state’s P10.8 trillion debt as of March, 72% was sourced locally while 28% was borrowed from foreign creditors, with the central bank becoming one of the government’s go-to sources of coronavirus funds apart from regular sale of T-bonds and T-bills.

Stable interest expenditure, in turn, is good for the government’s balance sheet since it would help the state avoid incurring a wider budget deficit that could trigger a credit rating downgrade, S&P explained. So far, the Bangko Sentral ng Pilipinas said it would keep its benchmark rate at historic-low to support economic recovery even as inflation remains elevated which, to be fair, is mainly due to supply problems.

“Global inflation fears are overblown, and that orderly reflation is a positive development for the world economy,” S&P said. “We believe global output will exceed 2019 levels by the middle of next year, as economies find a way to recover lost production and shift output toward new patterns of demand that underpin low inflation,” it added.

Source: https://www.philstar.com/business/2021/05/25/2100738/philippine-govt-seen-withstanding-shocks-unexpected-interest-rate-hikes