US Fed hike fallout in PH: Capital outflows, weaker peso, says analysts
MANILA, Philippines—The Philippines is among emerging markets in Asia-Pacific seen to suffer from the most capital outflows once the US Federal Reserve hikes interest rates multiple times this year, think tank Moody’s Analytics said on Wednesday (Jan. 19).
Singapore’s DBS Bank, meanwhile, also on Wednesday said the combo of US Fed tapering and rate increases would further weaken the peso beyond 52:$1 this year.
“The [Fed] is gearing up to hike rates in the first half of 2022,” said Katrina Ell, Moody’s Analytics senior Asia Pacific economist, in a report.
“Our January baseline assumes that the federal funds target rate increases in May, July, September and December. The implications for the Asia-Pacific region are significant,” Ell said.
Ell said a rise in US interest rate would mean higher treasury yields and stronger US dollar. “Higher yields attract capital flows into the US and away from emerging markets,” Ell said.
“There has been some pressure on emerging market currencies over the past year, but currencies have held up well so far in 2022, despite the acceleration of US policy normalization,” Ell noted.
For Ell, “Indonesia, India and the Philippines stand out for their increased vulnerability.”
“The Fed’s relatively transparent communications have reduced the likelihood of an abrupt adjustment,” Ell said.
“But there is still room for error that could trigger a sudden reversal in sentiment towards the region’s emerging markets. There could be increased pressure on some economies to tie local monetary policy rate hikes to what happens in the US,” Ell added.
Two other analysts—Duncan Tan of DBS Group Research rates strategist and senior FX strategist Philip Wee—said markets were already pricing-in four rate hikes by the US Fed this year, benefiting US treasury yields—the 10-year tenor climbed to 1.874 percent, the highest since January 2020 or before the COVID-19 pandemic struck.
As the US dollar strengthened, the Philippine peso and the Indian rupee weakened the most among emerging Asian currencies, DBS said. The peso depreciated against the greenback by 0.4 percent year-to-date.
“Apart from higher US bond yields, both currencies were weighed by elevated oil prices and record trade deficits,” DBS said. Benchmark oil prices hit a seven-year high of $87.50 per barrel last Tuesday (Jan. 18). The Philippines is a net-oil importer.
The Philippines’ trade-in-goods deficit swelled to a record $4.7 billion in November 2021 as imports soared while exports posted meager growth, putting pressure on the current account or stash of US dollars which was expected to have reverted to a deficit by end-2021.
“[The peso] has been extending its rise from 51 [against the US dollar] since the start of the year. Our forecast at 52 by the third quarter of 2022 is starting to look conservative,” DBS said.
DBS nonetheless noted that Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno had committed to support economic recovery by keeping the policy rate at the current record-low 2 percent during the first half of 2022.
