The outflow of capital—especially from the country’s financial markets—along with the feared economic slowdown in China remains the top challenges faced by the Philippines over the near term, according to a foreign exchange trading house.
In a recently published research note, Singapore-based FXPrimus said the Bangko Sentral ng Pilipinas was unlikely to follow the lead of the Bank of Indonesia in applying tools to curb capital outflows and that it would likely keep local interest rates at record lows.
FXPrimus expects the BSP to keep the policy rate at a record low of 3.5 percent until the first half of 2014.
“Actual capital outflow remains the top challenge for the Philippine financial stability environment,” FXPrimus senior economist Jimmy Zhu said in the research note, pointing out that the Philippine Stock Exchange Index had rallied more than 270 percent since the Federal Reserve started its quantitative easing program in 2009.
The peso, meanwhile, has appreciated against the dollar by some 50 percent during the same period.
“A large percentage of these capitals is speculative and short-term, which means the financial market will be extremely vulnerable to any external condition changes, such as the Fed’s policy adjustment,” he said, referring to the looming end of the Fed’s ultra-loose monetary policy scheme.
Recent data suggested that the Philippine economy benefited from its accommodative monetary policy while inflation pressure eased. The consumer price index in July declined to 2.5 percent from the earlier 2.8 percent in June, implying that financial stability risks have declined further.
Recently released export data also suggested that manufacturers benefited from the peso’s weakening, the forex broker said.
The latest data showed that exports expanded by 4.3 percent year-on-year, which is the fastest pace this year.
FXPrimus noted that the Philippine Exporters Confederation Inc. expected export growth to hit the 10-percent target for 2013. This means export growth should hit an average of 15 percent monthly in the remaining months this year.
“The leading industry could be the garments sector, since orders are up by 100 percent,” FXPrimus suggested.
The peso also continued to weaken against the dollar since mid May, and the forex broker believes the central bank is comfortable with an exchange rate that is within the 42-44 level.
“China is another threat to the Philippine economy, given the rising trade relationship between the two,” Zhu said, although he said the impact of a slowdown in the world’s second largest economy will not have an immediate impact on the country.
“With recent familiar topics, a successful reform in China will play a key role for the Philippines in a longer run. I also do not expect any impact in the near term, at least before 2016,” he said.