When the US Federal Reserve starts to rein in its policy of easy money, the Philippines may be among those that will likely emerge unscathed from the ensuing economic backlash, Japanese banking giant Nomura said.
In a June 28 report titled “Asia’s Rising Risk Premium,” Nomura said the recent selloff of Asian assets was a “healthy correction” because the underlying economic fundamentals in the region have been deteriorating in the last four years.
Nomura said that if investors in search of better yields were to revert to the practice of indiscriminately investing across Asia, regional policymakers might not be able to reset their accommodative monetary policies on time.
Nomura fears that Asian regulators may be “myopically focusing on the business cycle instead of the even bigger domestic private credit and property market booms.” The Japanese bank described the scenario as “a recipe for financial crises in the coming years.”
In the report, Nomura hoped that investors would go for sustainable growth over fast growth and favor countries that would pursue structural reforms and unwind the loose monetary policies that fueled credit and property market booms.
The Philippines and Taiwan stand out in this low-risk category, followed by Japan, the report said.
The report also said that countries with “weak economic fundamentals or those that are too slow in implementing structural reforms could struggle to attract investment.”
China, Hong Kong, India and Indonesia are currently in this category, Nomura said.
On global rebalancing, the report said Asia’s narrowing current account surpluses looked encouraging. But the bank is uncomfortable about the region’s average ratio of domestic private debt to gross domestic product. In 2012, the ratio stood at 167 percent, significantly higher than that of 1996 when the property markets of most countries were considered “frothy.” The Asian currency crisis erupted in 1997.
Nomura also expressed its concern over Asia’s central banks that have kept policy rates too low for too long in an attempt to minimize risks and avoid attracting strong capital inflows.
This has led to growing financial vulnerabilities across the region, it said.
“We would group China, Hong Kong and India firmly in the high-risk danger zone category. Indonesia is at the lower end of the high risk category. In the medium-risk category, we would bookend Korea, Malaysia, Singapore and Thailand at the higher end, and Japan at the lower end. The Philippines and Taiwan seem among the least vulnerable to a macro crisis,” the report said.
Nomura also said that Asia had come to rely on macroprudential tools in its attempt to contain credit and property market booms.
“But macroprudential tools are not the Holy Grail. These tools risk lulling central banks into a false sense of believing that policy has been sufficiently tightened only to find out that, over time, as loopholes are found, these tools have turned out to be a poor substitute for higher interest rates,” it said.
But in the case of the Philippines, the report said, remittances will continue to boost the current account surplus, supported by the fast-growing business process outsourcing (BPO) and tourism sectors. Overall, Nomura expects the current account surplus to remain solid over the next few years.
“From a savings/investment perspective, a strong investment cycle is underway, led by private sector spending. This rise in investment ratios has been accompanied by higher domestic savings, boosted by a growing middle class, as well as lower fiscal deficits as a result of reforms to improve governance,” the report said.—Doris C. Dumlao