Volatility returned to the financial markets last week, with the Philippine Stock Exchange Index falling by 2.8 percent and the peso depreciating on a week-on-week basis. This was triggered by a contagion from the ongoing financial crisis in Turkey, which saw its lira depreciate by as much as 12 percent early last week and 90 percent year-to-date. Although the Turkish lira has been weakening since the start of the year, the drop further accelerated last week after US President Trump announced he would double tariffs on Turkish steel and aluminum imports.
Despite the poor performances of the stock market and the peso following the sharp depreciation of the lira, the Philippines is not really vulnerable to the ongoing crisis in Turkey.
The Philippines has limited trade and financial ties with Turkey. In 2016, our total trade with Turkey was only $121.7 million or less than 0.1 percent of the Philippines’ total trade. Meanwhile, Philippine banks own very little, if any, Turkish debts, thus there should be no significant losses from loan defaults. European and American banks are Turkey’s major lenders, explaining why their stocks are currently being sold down.
The Philippines is also very different from Turkey despite sharing some similarities and being part of the same emerging markets basket.
Although the Philippines also suffers from a current account deficit, it is not comparable to Turkey’s. In the first quarter of this year, our current account deficit vis-a-vis the gross domestic product (GDP) was at 0.3 percent. In that same period, Turkey’s current account deficit to GDP was 7 percent.
Although inflation is also climbing in the Philippines, it is still way below at 5.7 percent. This, versus Turkey’s 15.4 percent.
Moreover, our central bank raised interest rates more aggressively—by 50 basis points in August—on the heels of inflation, reaching 5.7 percent in July. In contrast, the Turkish central bank left interest rates unchanged in July despite inflation hitting 15.4 percent in June, the highest level since 2003 and three times above its target of 5 percent.
Turkish President Recep Tayyip Erdogan has been very vocal of his views on higher interest rates, describing it as the “mother and father of all evil.” He also appointed his son-in-law Berat Albayrak to head the newly formed treasury and finance ministry, making the body’s independence highly questionable.
Another very important distinction between the Philippines and Turkey is the fact that the former is not dependent on foreign debts. As of end 2017, external debt was only 23.3 percent of the Philippines’ GDP, down from 44.5 percent from 10 years ago. By contrast, Turkey is more dependent on external debts, accounting for 53.2 percent of GDP in 2017, up from 36.6 percent in 2007.
Finally, the Philippines has ample foreign international reserves, enough to cover 7.3 months worth of imports. In contrast, Turkey only has enough reserves to cover 3.7 months.
Since the Philippines is not really vulnerable to the ongoing crisis in Turkey, the current market sell-off brought about by the contagion should not be feared but viewed as an opportunity to accumulate stocks at more attractive valuations.