PH seen in better shape to withstand volatility

Asia’s emerging markets are in a relatively better shape to withstand the new round of emerging-market shakeout compared to last year when the US Federal Reserve first unveiled plans to taper its monetary stimulus, American banking giant Citigroup said.

Citi chief economist for Asia-Pacific Johanna Chua said in a research paper dated Feb. 7 that Asia had outperformed other emerging-market regions in the recent selloff—a striking contrast to the taper-led sell-off last year—because current-account adjustments were already underway and capital flow structure was now much better compared with other regions to deal with the US tapering.

At the same time, Chua said none of the Asian central banks were likely to follow the route taken by Turkey, which aggressively raised interest rates recently to curb local currency depreciation. She said the Philippines, Malaysia and Indonesia were still likely to tighten policy rates earlier than consensus but noted that the former two had significantly less external imbalances constraining policy choices than Turkey. Citi said that it also believed all three Southeast Asian economies have better growth prospects.

On Turkey, Chua said its unorthodox monetary policy had created policy uncertainties, breaches in inflation target that dislodged inflation expectations while external financing requirements were stubbornly wide amid low foreign exchange reserves and a fragile global risk appetite, thus promoting the recent “bold” tightening move.

While US tapering was the culprit behind weakened sentiment on emerging markets, this time around, Chua said the worries were all about growth concerns, with US and China concerns clouding prospects for export recovery and thereby seen putting greater pressure on import compression and current-account adjustment in a backdrop of less favorable external funding environment.

But for Asia, Chua said this current-account adjustment was already underway and that while export challenges lingered, these should not be exaggerated.

In the case of the Philippines, Chua said it might seem more at risk on the domestic macro stability front given the pursuit of relatively “less orthodox” monetary policy—such as tinkering with special deposit account (SDA) rates given the undue preoccupation on the BSP’s balance sheet—and positive output gap. But in striking contrast to Turkey, China said the Philippines had “significantly less” constraints on external stability given its large current-account surplus and foreign reserves.

Chua added that “with such low leverage, growth outcome (in the Philippines) is unlikely going to be significantly compromised.”

For Asia’s four taper-sensitive countries —India, Indonesia, Malaysia and Thailand—Chua said all were already seeing current-account adjustment, the most dramatic of which was seen in India. While Asia’s rebounding export momentum since the third quarter of 2013 could falter in the short term, she said the outlook on US economic recovery this 2014 had not materially changed.

China’s slowdown risk is a real concern, Chua said, but noted that recent softness in its manufacturing gauge could not be distinguished from seasonal weakness. At the same time, she said there was no strong evidence to suggest that emerging Asia’s exports to China has underperformed other regions as China slowed in recent years.

“Emerging market growth worries indiscriminately applied to Asia look a tad overblown,” Chua said.

While China is a key risk, most of emerging market Asia should still see rebounding growth this year assuming recovery in developed markets could hold, she said.