(Part 1 of 2)
Nine months ago, Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. took a broad look at the economic landscape of the country and liked what he saw.
Growth, although not broad-based, was robust. The inflation rate was at its lowest level in history. And the cost of borrowing— a leading indicator of business activity—stood at levels never before seen by the local financial market. More importantly, the Philippines, then, stood on the cusp of attaining its very first investment grade rating from sovereign debt watchers.
All seemed well. But Tetangco knew there were dark clouds forming over the horizon. And in an Inquirer special report published in December 2012, the central bank chief aired a note of caution amid the euphoria that financial markets were feeling.
Asked about the single biggest threat to the Philippine economy, he said that the “sudden reversal of capital flows” was one such issue that kept him up at night.
Less than five months after the warning was made, the US Federal Reserve announced a plan to end its ultra-loose monetary policy regime (implemented to help the world’s biggest economy recover from the effects of the 2008 global financial crisis).
The effect of the announcement in emerging markets like the Philippines was nothing short of dramatic. From a peak of 7,403.65 in mid-May, the Philippine Stock Exchange index (PSEi) slumped almost 29 percent in a month, wiping out all the gains brought by the expected credit rating upgrade that finally came earlier in the year.
The PSEi recovered some of its losses as fears of the so-called “Fed taper” eased, only to fall back to the same levels late last month as the fears returned.
More importantly, the weakness in the local stock and currency markets were echoed by other emerging market economies. These economies—neighbors Indonesia, Malaysia and Thailand and emerging market powerhouse India, among others—were sent reeling by the prospects of a sudden departure of Fed-induced liquidity that had sent asset prices soaring around the world over the last few years.
In an interview last week to look back at his earlier warnings, Tetangco stressed how early preparations helped insulate the country from the symptoms that were now afflicting other emerging markets.
These preparations—implemented long before talk about the end of the Fed stimulus began—included appropriate monetary policy (interest rates that were neither too high nor too low) that was supportive of growth in a “non-inflationary environment.”
The BSP also used “macro-prudential” measures like adjusting the levers on its special deposit accounts (SDAs) to address financial stability pressures that could not be addressed by interest rates. At the same time, it also built up its foreign exchange reserves, strengthened the country’s external liquidity position, and actively engaged the foreign exchange market to prevent the peso from either rising or falling too rapidly.
‘PH did its homework’
“We also communicated out policies very clearly to guide markets and make policy more effective,” the BSP chief said. “So for the Philippines, we have done our homework.”
These measures have made the Philippines an island of calm amid turbulent seas afflicting emerging markets.
But Tetangco noted that significant risks remained, even with—or perhaps especially because of—the delayed end (announced last week) to the massive global stimulus provided by the US Fed’s $85-billion-a-month liquidity injection into the financial markets.
“After the surprise move by the Fed, risk appetite for emerging markets is ‘on’ again,” he said.
Given this, the Philippines will likely experience once more increased capital inflows, an appreciation of the peso against the dollar, and “exuberance in stock markets.”
“Again, investors seem to have been able to ‘buy time’ and can sit on their investments a bit longer—low interest rates are to remain for a bit longer as inflation expectations also continue to be well anchored,” he said.
Tetangco believes that the Philippine economy is safe, for now. But like him, some market watchers feel that the country will have to face the brunt of emerging market uncertainties sooner or later.
Tweeting about the reprieve gained by financial markets with the delay of the Fed taper, BDO Universal Bank chief strategist Jonathan Ravelas said: “The bad side of this is that we are going to have to do it all over again soon. The sooner the taper, the better so we all can move on.”
(To be concluded)