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PHL debt service bill seen as manageable even if rates rise

EMERGING MARKETS including the Philippines are expected to be “quite resilient” in the event interest rates rise, with many countries weighting their government debt in favor of local-currency issues, according to S&P Global Ratings.

A stress-test scenario of a 300-basis points rate hike indicated that emerging markets are likely to incur a 1 percentage point increase in interest expenses relative to gross domestic product (GDP) by 2023.

“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,” it said in a note Monday.

S&P expects the Philippines to incur interest expenses equivalent to about 1.9% of GDP between 2021 and 2023. This remains largely the same in a scenario where a 100- and 300-basis points rate hike shock is applied.

The Philippine debt stock was P10.774 trillion at the end of March, up 27% from a year earlier and up 3.5% from a month earlier, according to the Bureau of the Treasury. The Philippine debt mix is 72% local.

“Several emerging-market sovereigns (Hungary, India, Indonesia, the Philippines, Poland, South Africa, and Turkey) have already launched asset purchase programs targeting domestic government securities, either in the primary or secondary market, although the expansion of their central banks’ balance sheets has been more restrained than for developed-market peers,” S&P said.

In January, the Bangko Sentral ng Pilipinas (BSP) granted a fresh P540 billion to the National Government. The central bank has also been active in purchasing government securities in the secondary market.

S&P said emerging markets that are most vulnerable to higher refinancing costs include Egypt, South Africa, Ghana, and Kenya.

It also noted that Colombia, Egypt, Ghana, Kenya, Turkey, and Ukraine have sizeable foreign currency-denominated government debt, which will complicate their ability to control their cost of funding.

“If rates rise quickly to reflect rapid employment gains and buoyant GDP growth, against the backdrop of steady increases in productivity, the higher cost of debt servicing will almost certainly be offset by improving state revenue and more rapid consolidation of the primary (non-interest) government accounts,” S&P said.

On the other hand, in a scenario where higher rates are due to a delayed response from a central bank to inflation “caused by stagnating post-pandemic productivity”, S&P warned rate shocks could result in weaker exchange rates and risks the credit fundamentals of sovereigns.

The BSP maintained its key policy rate at 2% earlier this month to continue its support for the recovery. Officials have said they will act immediately if needed to respond to second-round effects of higher inflation including wage and transport fare hikes. — Luz Wendy T. Noble  

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