Pakistan, Sri Lanka and Vietnam most at risk

Singapore: Pakistan, Sri Lanka and Vietnam are the Asian countries most at risk of a credit-rating downgrade as the global economy heads into a recession and funds become scarcer, said Standard & Poor's.

"Pakistan is the weakest, followed by Sri Lanka, then Vietnam," said Elena Okorotchenko, head of Asian sovereign ratings at S&P.

"Pakistan faces severe pressure from the external side, the fiscal side, the monetary side, economic growth and politics. There are five angles in which we analyse a country's ratings and Pakistan is negative on all counts."

Foreign investors are exiting Asia's emerging markets as they seek less-risky returns amid the worst financial crisis since the Great Depression.

That's making it more difficult for nations in the region to pay for imports and is shrinking their foreign reserves.

"No country is immune from the global turmoil," Okorotchenko said in a November 5 interview in Singapore.

"Asia is facing this crisis in a far stronger position than 10 years ago. But even countries with very strong fundamentals are facing fund pull-outs as investors de-leveraging have no regard for fundamentals."

Pakistan's credit rating was cut by S&P on October 6 to CCC+, or seven levels below investment grade, on concern it won't be able to pay its $3 billion servicing costs debt due in the coming year. It approached the International Monetary Fund last month for a bailout package after its foreign reserves shrunk to $3.71 billion (Dh.13.65) on October 25 from $14.2 billion (Dh.52.16 billion) a year ago.

Funding difficulties are the biggest threat to Sri Lanka's ratings, Okoro-tchenko said. S&P rates Sri Lanka's long-term foreign currency debt at B+ with a negative outlook.

"Sri Lanka is facing funding concerns with rising short-term commercial debt while expectations of efforts to bring down fiscal deficits have proved incorrect," she said. "I cannot know at this stage if they will go to the IMF but they will definitely need to think of their funding sources."

Sri Lanka President Mahinda Rajapaksa unveiled a Rs1.19 trillion (Dh.39.67 billion) budget on November 6, from an estimated 1.02 trillion this year, and plans to increase overseas borrowing next year to fund the shortfall even as the IMF said reliance on foreign debt to finance expenditure could destabilise the nation's economy.

"Vietnam is the least weak of the three countries with negative outlooks," Okorotchenko said. "Measures by the central bank to address overheating in the economy seem to have worked," she stated. "Inflation and the current account deficit are coming down."

S&P lowered Vietnam's BB long-term foreign currency rating outlook to negative on May 2, citing the overheating economy which threatened stability.

Our biggest concern now is their banking sector which was the main contributor to the overheating problems," she said. "Now, the banks are sitting on these loans made during cheap funding times. Lending has almost stopped and the question is how this is going to affect banks, especially the small joint stock banks."

"The ratings company is unclear on the extent of problems in Vietnam's banking sector due to low transparency," Okoro-tchenko said.

"We are concerned about the state of Vietnam's banking system and transparency being so low nobody knows how bad the situation is," she said. "It's difficult to get any reliable information on the state of the banking system."

Even so, Okorotchenko says Vietnam is not heavily indebted.