US, Europe ‘hard landing’ feared to curb PH momentum

Many economies in Asia, including the Philippines, are faring better but there are increasing risks of fallout from large Western markets that are in danger of going to recession and hard landing.

Moody’s Analytics said in a commentary that decades-high inflation had prompted central banks to tighten policy more aggressively than what was anticipated a few months ago. This has resulted in the downgrading of global economic growth forecasts, while financial market conditions have tightened and emerging market outflows have stepped up.

“The Asia-Pacific (APAC) region is in a better position, with many countries still in expansion or recovery mode from the pandemic,” Moody’s Analytics said.

“But if conditions outside of the APAC region continue to deteriorate, recession risks will increase, particularly as exports are a critical growth driver, with the United States and Europe [being] important sources of demand,” it added.

The research firm also noted that central banks in Asia, like the Bangko Sentral ng Pilipinas (BSP), were stepping up monetary policy tightening, which could dampen the improvement in domestic demand.

According to Moody’s Analytics’ reckoning, the United States, the United Kingdom and much of Europe—all major trading partners of the Philippines—are at risk of recession. The central banks in these markets are leading the charge toward global tightening.

Some central banks in Asia, such as the BSP, have also resorted to off-cycle rate hikes, to improve external stability and tame inflation, but also partly to catch up with the aggressiveness of their counterparts in larger economies.

“Concern is palpable that central banks will not be able to engineer a soft landing amidst the race to tame inflation,” Moody’s Analytics said.

Also, citing its own data as well as that of the International Institute of Finance, Moody’s Analytics said the Philippine peso had been the third worst-performing currency across emerging markets before the BSP’s off-cycle, 75-basis-point rate hike last week.

The local currency is only doing better than the Argentine and Chilean pesos, which have lost value against the US dollar by more than 20 percent since the start of 2022.

In a separate commentary, Pantheon Macroeconomics maintained that the depreciation trend of currencies like the peso would not lead to faster rate hikes in the region and that the tightening cycle would be short-lived.

“Central banks still have much of the windfall in reserves accumulated since the pandemic hit to lean against excess depreciation,” the research firm said.

“For now, then, the foreign exchange declines are a non-issue,” it added. “The dollar has strengthened by more than currencies in emerging Asian markets have weakened, year to date.”

Pantheon Macroeconomics forecasts that the peso will appreciate to 54:$1 by the end of September and to 53.50:$1 by the end of December.