Some Asia-Pacific sovereign ratings at risk: S&P
Asia-Pacific countries which have launched energy price subsidies could suffer from the weaker sovereign ratings, Standard & Poor's Ratings Services warned.
The rating agency said that a sustained increase in oil prices could catalyze rating actions among some Asia-Pacific sovereigns, accordingly to a report on "The Asia-Pacific Sovereign Seesaw: If Oil Prices Soar, Some Ratings Could Fall" which was released last week.
"Sovereigns that subsidise oil consumption are the most vulnerable to negative rating actions if average oil prices stay above US$150 per barrel for more than a year, a scenario we currently consider to be only modestly likely," said Standard & Poor's credit analyst Kim Eng Tan.
According to Asian Development Bank, many countries in Asia have offered fuel subsidies. In 2010, Bangladesh's level was the highest at 5 per cent of gross domestic product (GDP). Thailand's subsidies cost nearly 3 per cent of GDP.
The S&P report said that oil subsidies can weaken fiscal and external indicators underpinning sovereign creditworthiness despite the support they lend to economic growth. Lowering subsidies, on the other hand, may risk political instability for some sovereigns.
"In India and Sri Lanka, we expect fuel and related subsidies to markedly worsen fiscal and external deficits unless subsidy levels fall. In the absence of offsetting positive developments, these sovereigns could see negative rating actions as a result," Tan said.
The report said that credit metrics of almost all sovereigns in Asia-Pacific would weaken from a scenario of rising oil prices. But policy decisions toward subsidies would affect the severity of the deterioration and the
impact on various credit factors. These will determine how, and if, sovereign ratings change.
