KUALA LUMPUR: A weak US dollar reduces debt-servicing costs for Asian ex-Japan issuers including companies and sovereigns while also encouraging capital inflows, Moody’s Investors Service says.
In its report examining the credit implications of a hypothetical prolonged weak US dollar, it said some market experts have suggested prolonged dollar weakness could be on the horizon.
“While this would weigh on the profitability of some companies with significant US dollar revenues, it would lower debt-servicing costs for Asian ex-Japan issuers and have a limited impact overall, ” according to a new report from Moody's Investors Service issued on Monday.
"A weaker dollar would support the region's credit conditions by reducing debt-servicing costs for dollar-denominated debt and encouraging capital inflows as Asian assets become relatively more attractive," said Deborah Tan, a Moody's assistant vice president and analyst.
"However, the region could see some differentiation in capital inflows, with more support for the Chinese renminbi, Korean won and Taiwanese dollar, given their economies' stronger fundamentals, growth trajectories and better handle over the pandemic," Tan said.
On the sovereign side, those with large foreign-currency liabilities, for example Sri Lanka, Indonesia and the Philippines whose foreign currency debt accounts for more than a third of total debt, could potentially reap savings from the weaker dollar.
But the deterioration in their fiscal metrics due to the pandemic would more than offset the potential benefits, leading to a limited overall impact.
At the same time, the weaker dollar would pose some negative effects in the form of reduced profit margins for companies with significant US dollar revenues.
While most rated companies in Asia ex-Japan are not large exporters to the US, Korean auto and technology companies, as well as Indian IT services companies are the exceptions to this and would likely feel the pinch.
Even in the event of prolonged weakness in the US dollar, the Moody's report concludes that its status as a global reserve and transaction currency is secure for now.
"As the durability of rival platforms and international financial arrangements remains uncertain, the pace of transition out of the dollar will likely be gradual and unlikely to dampen its dominance," Tan said.
Did you find this article insightful?