THE PHILIPPINES and its neighbors in Southeast Asia must brace for a decline in foreign reserve stock as central banks are expected to dig more into their war chests to counter external market headwinds arising from the United States and China.
This was the view of Bank of the Philippine Islands lead economist Emilio Neri Jr. and researchers Robbin Ivory Brillantes and Nicholas Mapa in a September research note: “China cloud, Fed rain: How big is your umbrella?”
As the US Federal Reserve primes for its first interest rate hike since 2006, the BPI research noted that emerging market economies went under duress as foreign investors scramble for the exit door while export receipts thin out.
“Now that the exodus has started, central banks have begun to draw down on the once-formidable stock of ammunition built precisely to counter such gyrations in financial markets during rainy days,” the BPI team said.
“As the upheaval begins, central banks in the region will need to tolerate drawing down on their foreign currency reserves to help their respective economies weather the Fed rate hike tempest,” it said.
Since the 1997 Asian currency crisis, BPI noted that Southeast Asian central banks had beefed up their international reserves, a strategy that got a big push from the monetary easing sanctioned by major central banks across the globe.
In the case of the Philippines, it was noted that gross international reserves (GIR) had gone up by 36 percent from the end-2010 level, with gross international reserves hitting a peak of $83.6 billion in October 2013.
As of mid-August, the GIR had gone down to $80.3 billion, which can cover 10.6 months’ worth of imports of goods and payments of services and income. It is also equivalent to 6.3 times the country’s short-term external debt based on original maturity and 4.5 times based on residual maturity.
China’s surprise devaluation of its currency while global investors were already jittery over the US Fed’s move, the BPI team said, was the “initial salvo in what may be a protracted capital flight, with regional central banks showing the initial bruises of the first round.”
Market volatility is seen to escalate ahead of the pivotal Sept. 16-17 meeting of the US Fed, the BPI economists said.
“Even ahead of the meeting, emerging markets currencies are floundering with central banks drawing down on their foreign reserves to stem the bleeding. With the flow of funds already reversed course, central bankers will soon find out if they had built up ample reserves to fend off the upheaval in respective markets and if their umbrellas are big enough to weather the impending storm,” the team said.
The Philippines’ GIR level has gone down by 3.9 percent from its peak, but this pace of decline is the slowest among regional peers relative to their respective peak GIR levels.