The Philippines is strong enough to withstand even a “sudden stop” in foreign portfolio investments that may result from the US Federal Reserve’s decision to reduce the monetary stimulus for the world’s largest economy.
Moody’s Investor Service said in a report this week that the economic activity of most Asian countries could slow down as the US Fed’s “taper” decision would lead to higher interest rates which, in turn, could make funding more expensive for companies and households.
But the credit rating firm said the Philippines would stand out, with demand expected to stay strong, supported by healthy dollar revenues from sources other than investments, the country’s strong banking system, and low levels of debt.
“The Philippines is reasonably well placed to weather any potential sudden stop in cross-border capital flows caused by the Fed tapering given its current account surplus and manageable levels of external debt,” Moody’s senior research analyst Rahul Ghosh said in an email to the Inquirer. “Moreover, the country’s relatively low leverage ratios across all sectors will be credit supportive in the event of further taper-induced market turbulence.”
In its report, the debt watcher identified several countries in the Asia Pacific that were vulnerable to the effects of the Fed tapering.
Earlier this year, the US Federal Reserve started slowing down its monthly asset purchases, which had been in place since late 2009. It cited the American economy’s recovery as the reason behind its decision.
From an original rate of $85 billion a month, the US Fed reduced its bond-buying program to $65 billion last month.
Across the region, Moody’s said India and Indonesia likely would continue to rely on portfolio investment inflows to fund their current account deficits, making them more vulnerable to capital flight.
Chinese companies, mainly in the property sector, would also depend on offshore funds entering emerging markets, which was previously fueled by the Fed’s asset purchases. As such, Moody’s said, these companies will be exposed to tightening domestic credit conditions.
Rapid growth in household credit in Southeast Asian economies, most notably Thailand and Malaysia, will also weigh on the banking sector’s performance in an environment of rising rates and weaker asset prices, particularly in the property sector.
But according to Moody’s, the Philippines has enough structural buffers to protect it from the risks now threatening its neighbors.
“The Philippines’ household debt-to-GDP ratio is among the lowest across Asia,” Moody’s said.