Singapore — The strengthening U.S dollar since mid-April has led to sharp currency depreciation and significant declines in foreign exchange reserves in a number of emerging and frontier market countries, increasing credit risks for those with large external funding
needs, Moody’s Investors Service said in a report on Wednesday (27/06).
The report looks at the external exposure of 40 emerging and frontier market sovereigns with some of the highest levels of external debt, either in U.S dollar terms or in relation to the size of their respective economies.
Some countries among the most vulnerable to a stronger U.S dollar are Argentina (B2 stable), Ghana (B3 stable), Mongolia (B3 stable), Pakistan (B3 negative), Sri Lanka (B1 negative), Turkey (Ba2 Review for downgrade), and Zambia (B3 stable). Chile (Aa3 negative), Colombia (Baa2 negative), Indonesia (Baa2 stable) and Malaysia (A3 stable) are also exposed, but financial and institutional buffers lower near-term vulnerability.
“Countries with large current account deficits, high external debt repayments and substantial foreign-currency government debt are most exposed to the impact of a stronger US dollar,” said Alastair Wilson, Moody’s Global Managing Director of the Sovereign Risk Group.
He adds: “To the extent that these currency fluctuations reflect capital outflows or significantly lower external inflows, they are credit negative for sovereigns with large external funding needs.”
Emerging markets that have been prone to large shocks to external financing conditions in the past are — all else equal – more likely to experience large shocks now unless past shocks led to adjustments that reduced their reliance on external funding.
In 2014, Hungary, Malaysia, Mongolia and Russia were among those that experienced particularly large shocks to their external financing conditions. In the period since then, Angola (B3 stable), Kenya (B2 stable), Indonesia and Sri Lanka experienced relatively large negative shocks. Of these, Kenya, Mongolia, Sri Lanka and Zambia remain highly
vulnerable, implying high structural hurdles to lowering reliance on external financing.
Brazil (Ba2 stable), China (A1 stable), India (Baa2 stable), Mexico (A3 stable), and Russia (Ba1 positive) are among the least vulnerable to tightening external financing conditions because of their low reliance on external capital inflows.
Sustained and severe shocks to external financing conditions can have credit implications, in particular when they result in a significant further erosion of financial buffers, raise liquidity risks and/or take fiscal metrics onto a more unfavourable path than Moody’s had previously expected.
Previously, Moody’s reported Indonesia and India are among Asia’s worst-hit Asian currencies this year. It’s no surprise that India and Indonesia are among the worst-hit Asian currencies this year when we look at their foreign debt exposure and the level of reserves they have to cover that.
It said Moody’s Investors Service’s external vulnerability index – puts Indonesia at 51 per cent and India at 74 per cent. External vulnerability index is the ratio of short-term debt, maturing long-term debt and non-resident deposits over a year calculated as a proportion of reserves.
The report added that Malaysia and the Philippines are the odd economies out with Malaysian currency ringgit gaining this year while the Philippines has a low foreign exposure but a currency which is the second worst-doer in Asia.
Finance Minister Sri Mulyani Indrawati has assured the public the government will keep the country’s debt-to-GDP ratio below 30 per cent, far lower than the legal threshold set at 60 per cent.
Indonesian government debt reached Rp3,938.7 trillion (US$279.34 billion) as of the end of 2017, up from its position of Rp3,515.4 trillion at the end of 2016. Despite this bulge, Indonesia’s public debt is still considered ‘safe’ at just 29.2 per cent of gross domestic product (GDP).
This figure certifies Indonesia as one of the world’s healthier economies in terms of debt-to-GDP (Indonesian law caps the ratio at 60 per cent of GDP). Many emerging peers as well as advanced nations – for example the United States and Japan – have much higher debt-to-GDP ratios.
The Indonesian government’s external debt consists of bilateral and multilateral loans, export credit facilities, commercial loans, leasing and government securities owned by non-residents, issued on both foreign and domestic markets.
Government securities consist of both conventional and Islamic debt instruments; government bonds fall due after more than 12 months and Treasury Bills less than or 12 months. Government Islamic Securities consist of both long-term instruments (Ijarah Fixed Rate) and Global Sukuk.
This debt is manageable and actually quite low compared to that of other key emerging economies or even advanced economies. For example, Malaysia’s and Brazil’s public debt-to-GDP ratios stand at 56 per cent and 70 per cent, respectively. Meanwhile, the ratios of the USA and Japan stand at 105 per cent and 246 per cent, respectively.
Bank Indonesia senior deputy governor Mirza Adityaswara stated that while Indonesia’s foreign debt was still under control, the country’s deficiency in exports has resulted in the current deficit reaching historic proportions.
Indonesia has an external debt to GDP ratio of 34.5 per cent, similar to Thailand’s 33.9 per cent, he said, adding, however, that Indonesia’s external debt to current account receipts was 169.9 per cent, while Thailand and Malaysia’s were just 46.4 and 9.0 per cent, respectively.