S&P Most Concerned About Pakistan, Sri Lanka, Vietnam in Crisis

By Patricia Lui

Nov. 10 (Bloomberg) — Pakistan, Sri Lanka and Vietnam are the Asian countries most at risk of a credit-rating downgrade as the global economy heads into a recession and funds become scarcer, said Standard & Poor’s.

“Pakistan is the weakest, followed by Sri Lanka, then Vietnam,” said Elena Okorotchenko, head of Asian sovereign ratings at S&P. “Pakistan faces severe pressure from the external side, the fiscal side, the monetary side, economic growth and politics. There are five angles in which we analyze a country’s ratings and Pakistan is negative on all counts.”

Foreign investors are exiting Asia’s emerging markets as they seek less-risky returns amid the worst financial crisis since the Great Depression. That’s making it more difficult for nations in the region to pay for imports and is shrinking their foreign reserves.

“No country is immune from the global turmoil,” Okorotchenko said in a Nov. 5 interview in Singapore. “Asia is facing this crisis in a far stronger position than 10 years ago. But even countries with very strong fundamentals are facing fund pull-outs as investors de-leveraging have no regard for fundamentals.”

Pakistan’s credit rating was cut by S&P on Oct. 6 to CCC+, or seven levels below investment grade, on concern it won’t be able to pay its $3 billion debt servicing costs due in the coming year. It approached the International Monetary Fund last month for a bailout package after its foreign reserves shrunk to $3.71 billion on Oct. 25 from $14.2 billion a year ago.

Funding difficulties are the biggest threat to Sri Lanka’s ratings, Okorotchenko said. S&P rates Sri Lanka’s long-term foreign currency debt at B+ with negative outlook.

Funding Concerns

“Sri Lanka is facing funding concerns with rising short- term commercial debt while expectations of efforts to bring down fiscal deficits have proved incorrect,” she said. “I cannot know at this stage if they will go to the IMF but they will definitely need to think of their funding sources.”

Sri Lanka President Mahinda Rajapaksa unveiled a 1.19 trillion rupee ($10.8 billion) budget on Nov. 6, up from an estimated 1.02 trillion this year, and plans to increase overseas borrowing next year to fund the shortfall even as the IMF said reliance on foreign debt to finance expenditure could destabilize the nation’s economy.

Vietnam is the least weak of the three countries with negative outlooks, Okorotchenko said. “Measures by the central bank to address overheating in the economy seem to have worked,” she said. “Inflation and the current account deficit are coming down.”

S&P lowered Vietnam’s BB long-term foreign currency rating outlook to negative on May 2, citing the overheating economy which threatened stability.

`Low Transparency’

“Our biggest concern now is their banking sector which was the main contributor to the overheating problems,” she said. “Now, the banks are sitting on these loans made during cheap funding times. Lending has almost stopped and the question is how this is going to affect banks, especially the small joint stock banks.”

The ratings company is unclear on the extent of problems in Vietnam’s banking sector due to “low transparency,” Okorotchenko said.

“We are concerned about the state of Vietnam’s banking system and transparency is so low nobody knows how bad the situation is,” she said. “It’s difficult to get any reliable information on the state of the banking system.”

Even so, Okorotchenko doubts that Vietnam will need to turn to the IMF for aid as the country is “not heavily indebted.”

Risks Shifting

Aside from Pakistan, Sri Lanka and Vietnam, S&P is also “closely watching” India, South Korea, Malaysia, Thailand and Indonesia even as the rating company maintains a stable outlook on them “as their balance of risks is shifting,” she said.

Fitch Ratings today lowered its outlook on South Korea’s credit ratings to “negative” from “stable,” citing concern that its foreign-exchange reserves may decline as the country faces its biggest crisis since 1997. Fitch also lowered Malaysia’s outlook to “stable” from “positive.”

South Korean banks’ funding requirement is the top concern for S&P, Okorotchenko said. “Korea is facing this crisis from a stronger position and we recently affirmed their stable outlook,” he said. “But the banks’ funding needs are high, especially the short-term. For now, we think the risk for sovereign ratings is balanced.”

For problems for Malaysia “are a mixture of both fiscal and political,” she said. “Transition to democracy can never be smooth and while it may be positive in the long-run, there can be bumps long the way.”

Political Uncertainty

“India has always been running a deficit but they’ve been consolidating and our upgrade last year to investment grade was based on its fiscal progress,” she said.

Thailand is being monitored for political uncertainty, she said. “If it gets out of hand, affects policy decision making and long-term investor sentiment is damaged, these could potentially lead to negative outlook or a downgrade.”

S&P is “least concerned” about Hong Kong, China, the Philippines, Cambodia and Mongolia, Okorotchenko said. “They are on different rating levels but they are stable in their respective ratings,” she said.

Hong Kong’s “fiscal and external positions are solid” while “Singapore is the strongest in the region due to its reserves and robust public finances,” she added.

To contact the reporter on this story: Patricia Lui at plui4@bloomberg.net



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