With emerging market economies in the region falling prey to the uncertainties caused by the end of the US Federal Reserve’s stimulus program—which will happen, most likely sooner rather than later—it is tempting to view the Philippines as immune from the malaise that afflicts our neighbors.
Tempting, but not wise.
“Despite our good fundamentals we are not immune to volatility,” BDO Universal Bank chief strategist Jonathan Ravelas told the Inquirer. “In the recent bad episode of volatility, most of the countries in the region (including the Philippines, which had superior economic fundamentals) were moving in tandem.”
Indeed, the nature of financial markets—whether they be equities, currencies or bonds—is that they react first to external developments, sometimes violently, before calmer head prevails.
“We were just lucky that our markets were stirred, but not shaken,” Ravelas said.
There are key structural differences that help insulate the country from the emerging markets bug. The Philippines enjoys a current-account surplus, which is central bank-speak for a condition where more dollars are entering the economy than leaving.
This surplus is due mainly to the large remittances sent home by expatriate Filipinos, an amount that the Bangko Sentral ng Pilipinas expects to hit $22.5 billion this year.
There is also the dollar revenues of the business process outsourcing (BPO) sector, which the industry association predicts will reach $15 billion by the end of 2013.
Market watchers also agreed that, for the most part, the Philippine government has also succeeded in buttressing the economy with sound fundamentals, like an improved fiscal position; an interest rate regime that gives the central bank room to either cut or raise interest rates; a big amount of liquidity in the financial system, along with the implementation of governance reforms.
These factors—together with last week’s announcement that the US Fed would delay the implementation of its feared “tapering” policy of reducing its monthly bond purchases—have given the Philippines more time and space to reinforce its economy.
But the additional time could also provide the country and the rest of the world with a false sense of comfort, warned BSP Governor Amando Tetangco Jr.
“The delay of Fed tapering could have some unintended consequences,” he told the Inquirer. “For example, for emerging market economies with current-account deficits, they may be encouraged to re-balance [more] slowly, delaying appropriate monetary policy and accumulating even larger stocks of external liabilities.”
If policymakers and investors become complacent, the inevitable end of the low interest rate regime used by the US Fed to jump-start the world’s biggest economy would result in problems that “could be even more pronounced than it was during May and June,” he cautioned.
At the same time, the Philippines is also being threatened by the expected slowdown in China’s economic growth rate, along with the possible reversal of the “slow but positive growth rate in Europe” or if the pickup in Japan falters—all because of trade ties with them.
“If the growth in these other anchors of growth in Asia slows or does not materialize, the Philippines could be affected,” Tetangco warned. Japan, in particular, accounts for almost 19 percent of the country’s exports, while Europe and China take up 13 and 11 percent, respectively.
For BDO’s Ravelas, the positive factors protecting the country are welcome. But it is hardly the time to relax.
“I wish I could say it’s ’clear skies ahead’. However, this is not the case,” he said, describing the postponement of the Fed taper as a ’Sword of Damocles’ hanging over the heads of countries like the Philippines.
The chief strategist of the country’s largest bank believed that Philippine financial markets would have to contend with extreme volatility again down the road—and the possibility, remote though it may be—that the wave of adverse developments now hitting Indonesia, Malaysia, Thailand and India might overwhelm local defenses.
Having first sounded a note of caution through an Inquirer special report in late 2012, BSP’s Tetangco remained just as cautious nine months later.
“We are in a better position than our neighbors,” he said. “But we have to be watchful and be prepared. Unfortunately, we’ll probably see these [financial market] jitters every six weeks [coinciding with the regular policy meetings of the US Fed].”
Now, as it was before volatility became a regular occurrence nine months ago, vigilance is key to preserving the Philippines’ economic gains.