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Long energy disruptions to raise pressures on SEA nations: S&P Global
Sovereign ratings in Southeast Asia are under risk due to the Middle East conflict. Fiscal and external metrics underpinning the ratings will be strained if the global energy market does not begin to normalise in the next few months, the credit rating agency noted.
Prolonged energy disruptions will raise fiscal and external pressures on Southeast Asian nations, according to S&P Global.
Indonesia is more vulnerable to weakening credit metrics if the war continues and energy prices remain high.
Vietnam’s strong economic growth, its booming export sector and relatively unencumbered government balance sheet will act as ballast against the energy market dislocation.
If the longer-term impact of the war is severe, the robust growth prospects of economies dependent on imported energy may also be impaired, weakening economic support for the ratings, it said.
Its base case assumes the war’s intensity will peak and the Strait of Hormuz’s effective closure will ease during April, but some disruptions are likely to persist for months.
A prolonged surge in the cost of energy imports—coupled with a loss of foreign exchange reserves—is one risk scenario that could materially weaken Vietnam’s external liquidity position, the credit rating agency said in a regulatory article.
And a sharp increase in the fiscal deficit, in the unlikely event that economic growth also decelerates abruptly, could also erode the government’s more favourable leverage profile, it noted.
If these scenarios persist beyond six months and the government is unable to mitigate the impact on credit metrics, they could erode Vietnam’s robust credit buffers at the current ratings level.
If the pressure on the economy causes capital outflows, the authorities may use foreign exchange reserves to support the exchange rate.
The budget deficit in the country could also widen if the energy disruption drags on. Outcomes will ultimately be tied to the duration of the conflict and the disruptions, it said
Meanwhile, the sovereign ratings on Indonesia (BBB/stable/A-2) are sensitive to weakening fiscal or external credit metrics resulting from the war.
Potential risks include higher energy prices raising budgetary subsidy payments, weighing on deficits; government interest payments rising if accelerating inflation fuels a further increase in market interest rates; and importing more expensive oil products widening the current account deficit (CAD).
The government’s response to the energy disruption may contain some of the damage to its fiscal performance, S&P Global Ratings noted. But, higher commodity prices could also boost government revenue. This helps to limit the increase in the size of the fiscal deficit and reduces upward pressures on the budgetary interest payment ratio.
Indonesian exports have grown this year, but the growth momentum is tempered by declining sales of energy products. With the sharp rebound in energy prices, Indonesian export growth could rise further to mitigate the increase in oil imports.
Overall, Indonesian credit metrics are likely to weaken marginally under the credit rating agency’s base case.
As a commodities exporter, Indonesia may see some mitigating developments offsetting some of the pressures on the sovereign ratings, particularly if there is a broad-based strengthening of commodities prices. This could help to turn around some of the worsening trend in the country’s credit metrics once the situation normalises.
Fibre2Fashion News Desk (DS)