THE PHILIPPINES HAS ?SIGNIFICANT? exposure to an emerging global recession but has built up internal buffers to cushion against external shocks, American banking giant JP Morgan said.
In its latest emerging market research dated Oct. 16, JP Morgan held the view that local monetary and fiscal policymakers were well-positioned to act, if needed, to help perk up domestic output given the uncertainties in the global economy.
JP Morgan estimated that every percentage point drop in US growth would shave 0.4-0.5 percentage point from the growth in the Philippines? gross domestic product (GDP), or the sum of all goods and services produced by the local economy in a given period.
Remittances are also directly exposed since more than 30 percent of overseas Filipino workers (OFWs) are based in the United States, the research said.
But JP Morgan noted that there had been minimal bond financing by Philippine corporations. It added that real estate and stock market prices have previously moved up but still lagged many of their regional peers, thus dismissing concerns that they were nearing ?bubble? type levels.
?Bank foreign funding both as a percent of GDP and as a share of total bank liabilities is manageable and derivatives licenses had been given out prudently, so there has been no excessive activity there,? it said.
And as inflation has peaked and now on track to slow down to single-digit levels by February or March next year, JP Morgan said a return to the 2.5-4.5 percent range would be possible by the middle of 2009.
?Rice itself, which alone makes up 9.36 percent of the CPI (consumer price index) basket, has seen its price start falling in August and forecasts point to favorable weather through early 2009,? the research said.
After a series of interest rate increases sanctioned since June this year, the Bangko Sentral ng Pilipinas paused on its monetary-tightening campaign now that price pressures were softening and inflation expectations also easing.
?Fiscal policy is also well-positioned. The postponement of the balanced budget target to 2010 was already a compromise, done in reaction to concerns over global growth. And if needed, additional fiscal stimulus measures could be deployed,? JP Morgan said.
The International Monetary Fund defines global recession as a slowdown in global growth to 3 percent or less. In its latest world economic output forecast, the IMF has projected such a major downturn by next year.
Meanwhile, JP Morgan said the Philippines? balance of payments (BOP) would be under strain but still looked resilient on receipts from overseas Filipinos, tourism as well as the fast-growing business process outsourcing (BPO) sector.
The BOP measures the foreign exchange transactions between the local economy and the rest of the world. Any transaction that gives rise to outflows like a pullout of foreign investments, importation or debt servicing is a deficit item in the BOP, while any that gives rise to inflows like borrowing, exporting or overseas remittance is a surplus item.
?OFW remittances continue to grow and importantly, should be more resilient as the quality of workers deployed has improved, as reflected in the rise in their average incomes,? the paper said.
?Tourism receipts are rising as we head toward the peak season in the fourth quarter,? it added.
Inflows from BPO operations, largely relocating from India and China, are also diversifying from just call centers to areas, such as software development, medical and legal transcription and are now bringing in $3-$4 billion a year, the research noted.
?As costs are cut in developed markets in a global recession, BPO activities could actually rise,? JP Morgan said.
It said the country?s gross international reserves were expected to end the year higher at $37 billion, despite the decline in the current account surplus.
?Lastly, in terms of an external liquidity buffer, recall that the Philippines has about $30 billion in foreign currency deposit units in the banking system which can be used for the US dollar needs of local (firms),? it said.
