Moody’s: Borrowers to face debt shock next year

Governments and corporations accumulating a significant amount of debt to combat the effects of the coronavirus disease 2019 (COVID-19) are bound to shell out expensive loan payments beginning next year, according to debt watcher Moody’s Investors Service.

The scenario applies most especially to Southeast Asian countries such as the Philippines, Indonesia, and Sri Lanka which have foreign borrowings accounting for more than a third of their total liabilities.

“Through 2021, we project a worsening in debt affordability, as measured by interest payments as a share of revenue, driven by higher debt-servicing costs associated with the large increases in debt as governments ramp up stimulus spending amid simultaneously large declines in revenue,” Moody’s was quoted as saying in a report by The Philippine Star.

Governments in Asia resorted to borrowings this year to ensure cash flow while they keep the virus outbreak at bay. Luckily, the weaker dollar cut costs of these obligations and made borrowings more affordable.

However, Moody’s warned of a calendar shift, where annual interest payments were expected to start declining early next year. This meant that strong currency may no longer support governments on hefty fund-raising this year.

“For sovereigns whose foreign-currency liabilities comprise a large share of total government debt, a weaker dollar could lessen debt servicing costs on existing foreign-currency exposures in local-currency terms,” Moody’s said.

“For example, the Philippines could potentially reap significant savings from the weaker dollar. However, the deterioration in fiscal metrics resulting from the pandemic shock more than offsets the potential benefit,” it added.

Companies in such Asian territories that similarly resorted to foreign borrowings would face similar hurdles.

Banks, which already face massive losses from unpaid loans from their customers, were seen more at risk of cash struggles next year due to non-performing debts.

“Some banks in Singapore, Thailand, and the Philippines have already taken advantage of the weaker US dollar and low-interest environment to issue dollar-denominated bonds to shore up their capital and secure longer-term financing at lower rates,” Moody’s said.

“While prolonged dollar weakness would be positive for issuers of dollar-denominated debt, it would weigh on the profit margins of companies with significant US dollar revenue,” it said.

Photo from Flickr