Fitch says Phl, emerging markets in no danger of credit crunch

MANILA, Philippines - Emerging markets (EM), including the Philippines, could withstand the withdrawal of cheap money from the United States without the risk of a credit crunch, a debt watcher said.

“Fitch does not anticipate widespread EM credit distress owing to a secular improvement in credit fundamentals, which reduces risk from tighter global liquidity, higher interest rates and foreign exchange risk,” the credit rater said in a report late Monday.

In its Mid-year Sovereign Review and Outlook, the New York-based agency said the recent market volatility was a “natural” reaction of investors to the possibility the US Federal Reserve may taper off its bond purchases.

Last month marked a massive sell-off in Asian financial markets after investors took their cue to go back to the US from Fed Chairman Ben Bernanke, who said should signs of US recovery strengthen, the monthly $85-billion quantitative easing (QE) may be wound down “later this year.”

In the short-term, Fitch said what happened in emerging markets was a healthy correction, noting that prior to the volatility, policymakers were worried of “excessive” capital inflows and asset bubble formations.

“The Fed’s early move may in the long term be better for EMs by taking some froth from the top of the market, slowing the pace of hot money capital inflows, easing the pace of credit growth and preventing a misallocation of risk…,” Fitch added.

Should the volatility worsens though, the agency said credit would still be supported as developing nations still have healthy  foreign exchange reserves and “flexible” foreign exchange regimes.

Debt maturities were also lengthened in most territories, Fitch said, easing strains that may occur from the need to settle borrowings that came with the QE-led credit boom. Most liabilities are also funded locally.

Finally, inflation has declined, providing room for central banks to respond by allowing healthy lenders to give out credit.

"Most EMs showed impressive resilience in coming through the stresses of the global financial and euro zone crises,” the agency said.

Nevertheless, Fitch said an end to QE  still “adds to worries over slowing EM growth.”

“Several large EMs are experiencing strains from spillovers from advanced economies and China, difficult policy trade-offs, a declining impact from credit growth and structural bottlenecks,” the credit rater said.

Based on Fitch’s estimates, growth in emerging markets will continue to “outstrip” that of advanced economies. For 2013, the former is estimated to grow 4.8 percent against the latter’s 0.9 percent.

In 2012, developing nations grew an average of five percent, while their developed counterparts expanded one percent.

As to credit ratings, Fitch said recent market movements have put upgrades “on hold” on emerging markets, in general. It noted however that the Philippines is one of the countries that bucked the trend.

The country bagged its first investment-grade rating from Fitch last March.