Moody's: Currency depreciation poses risk to APAC emerging markets with high external funding needs

The currency depreciation witnessed across Asia Pacific in recent months points risks to the region's emerging and frontier markets, says Moody's Investors Service. The credit implications are more negative for countries with high external financing needs. This includes the frontier markets of Pakistan (B3 stable), Mongolia (B3 stable) and Maldives (B2 stable).

India's low dependence on foreign currency to fund debt burdens limits the risk of a weaker currency transmitting into weaker debt affordability. While, sovereigns with high external financing needs are most exposed. In Indonesia and the Philippines, currency pressure will exacerbate already weak debt-affordability metrics. If associated with capital outflows, tighter financing conditions will have wider repercussions for the balance of payments." says Anushka Shah, a Moody's Vice President and Senior Analyst.

Moody's points out that the extent of depreciation seen this year has been less pronounced than during the taper tantrum in 2013. Also, ahead of the recent financial market volatility, most large emerging markets in APAC have accumulated sizeable reserve buffers, affording some policy space. Prolonged currency depreciation also presents fiscal risks to those frontier economies with substantial foreign currency debt by inflating debt servicing needs, namely Sri Lanka, Maldives and Mongolia.

Countries with large current account deficits are particularly vulnerable to a prolonged rise in risk aversion which could see capital outflows that leave them with lower foreign reserve positions. Sovereigns with high external debt obligations relative to their foreign reserves, such as Sri Lanka (B1 negative) and Mongolia, are also particularly at risk.

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