The Philippines, along with a number of Asian countries, is likely to accept a weakening of the local currency to cope with shock waves from China, economists from American banking giant Citi said.
In a Citi research note dated Aug. 26, the bank said China’s devaluation of the yuan was more aggressive than earlier thought and may spark “beggar-thy-neighbor” responses.
The research note said expectations of further currency depreciation–particularly after the move by the Chinese central bank to make the exchange rate more “market determined”—would help fuel capital outflows from China.
A “beggar-thy-neighbor” policy refers to an international trading policy that utilizes currency devaluations and protective barriers to alleviate economic difficulties at the expense of other countries. It usually comes in the form of boosting exports, while cutting reliance on imports.
“Korea, Taiwan, Thailand and the Philippines will accommodate (even ‘encourage’) FX (foreign exchange) weakness as initial response,” Citi said.
Last Monday, tagged as “Black Monday” due to the global meltdown of stock markets, the Philippine peso depreciated to five-year lows against the US dollar.
“We are wary of calling for immediate rate cuts elsewhere just yet—though those that haven’t cut yet —Philippines and Taiwan—are candidates,” the research note said.
Tolerance to foreign exchange volatility may be more constrained in Indonesia and Malaysia, the research note said.
The research note said China’s slowdown was posing a triple shock: spillovers from increased global exposure to China’s final demand; commodity price shock; China’s export competition/import substitution.
“Policy responses are likely reactive, not preemptive. Some vulnerable Asian countries have monetary space given benign inflation, but less room in other EM (emerging markets),” it said.
Another research note from Citi said China’s growth anxiety posed a challenge to Asia’s trade growth. For instance, it was seen becoming more challenging for other exporters “via China’s catchup in higher-tech goods production and China exporting its excess capacity, undercutting rivals.”
Meanwhile, Citi said China’s recent easing of measures via a 25-basis point cut in lending and deposit rates as well as a 50-basis point reserve requirement cut would now be critical.
“Global risk appetite depends on China’s equity markets stabilizing in response, especially after falling 25 percent in six sessions. If sentiment continues to deteriorate, investors may also pin hope on a coordinated message from global policymakers at Jackson Hole later this week,” the bank said.
In Citi’s view, China’s main easing measures may not be enough to stabilize either economic activity or equity market sentiment. It said the measures may only increase the pressure for renminbi depreciation.