Sovereign ratings at risk due to fuel sudsidies: S&P
Asia-Pacific countries that have introduced energy-price subsidies could suffer from weaker sovereign ratings, Standard & Poor's Ratings Services has warned.
A sustained increase in oil prices could catalyse rating actions among some Asia-Pacific sovereigns, the rating agency said in relation to a report on “The Asia-Pacific Sovereign Seesaw: If Oil Prices Soar, Some Ratings Could Fall”, which the company released last week.
“Sovereigns that subsidise oil consumption are the most vulnerable to negative rating actions if average oil prices stay above US$150 [Bt4,613] per barrel for more than a year, a scenario we currently consider to be only modestly likely,” said S&P credit analyst Kim Eng Tan.
According to the Asian Development Bank, many countries in Asia provide fuel subsidies. In 2010, Bangladesh’s subsidy level was the highest, at 5 per cent of gross domestic product. Thailand’s subsidies cost nearly 3 per cent of GDP.
The S&P report says 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 says the credit metrics of almost all sovereigns in Asia-Pacific will weaken from rising oil prices.
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