SE Asia ratings are wrong, say investors

Moody's and S&P sovereign debt rankings 'divorced' from market prices

PUBLISHED : Tuesday, 12 March, 2013, 12:00am
UPDATED : Tuesday, 12 March, 2013, 6:42am

The bond market is telling Moody's Investors Service and Standard & Poor's that they've got it wrong in rating sovereign debt in Southeast Asia.

The cost of protecting notes sold by Indonesia, Thailand, Malaysia and the Philippines against default averages 96 basis points, CMA data shows, compared with 262 for Italy and Spain.

Debt stood at 51 per cent of gross domestic product in the Philippines and 25 per cent in Indonesia, both rated junk by S&P, compared with 126 per cent in Italy, ranked three levels higher.

"The international agencies are wrong in their ratings of some of the Asean sovereigns," said Lee Kok Kwan, deputy chief executive of CIMB, Malaysia's top bond arranger. "Market prices for the last three years have been so completely divorced from ratings."

The credit-default swap market is anticipating upgrades for some of the largest economies among the 10-nation Association of Southeast Asian Nations, which the International Monetary Fund forecasts will expand 5.5 per cent this year compared with 0.2 per cent shrinkage in the euro area.

Ratings companies are losing their following among investors. Almost half the time, government bond yields fall when an action suggests they should climb, or they increase even as a change signals a decline, according to data covering the past 38 years.

Interest rates moved in the opposite direction 47 per cent of the time for Moody's and for S&P, according to the data on 314 upgrades, downgrades and outlook changes. The data measured yields after a month relative to US Treasury debt.

Asean leaders responded to a collapse in their currencies 15 years ago by bolstering their foreign reserves and reining in excessive spending.

International reserves in Malaysia, Indonesia and Thailand average US$137 billion and their gross savings were at least 31 per cent of 2011 GDP.