US Fed taper weighs heavily on BSP

The past 12 months were in many ways a coming-out year for the Philippines, which now has one of the world’s fastest-growing economies in the world after decades in the gutter.

Topping the list of the country’s achievements this year is the investment grade it secured from the world’s top credit watchers: Standard & Poor’s, Moody’s Investor Service, and Fitch Ratings.

Consumer prices remained stable throughout the year, despite a significant increase in government spending and bank lending amid record-low interest rates. This helped the economy record three consecutive quarters of above 7 percent economic growth despite tough global conditions.

Even the strongest typhoon ever to make landfall was not enough to spoil the fun completely. Despite its human and social cost, Supertyphoon “Yolanda’s” probable effects on the economy have been all but brushed off.

Yes, growth is expected to slow slightly and consumer prices have risen due to the typhoon, but both are likely to be temporary.

The government is still confident the economy will grow at the top end of the administration’s ambitious target for the year. Monetary officials too are unconcerned over inflation in the next 12 months.

However, prospects for the coming year are no longer as rosy as they were in 2013.

Weighing heaviest on local policymakers’ minds is the normalization of monetary policies in the United States as the Federal Reserve starts scaling back its unprecedented bond-buying program in January.

“What is worrisome is if the US economy improves faster than expected. This would make emerging market assets seem expensive, and the money will go out,” BDO chief market strategist Jonathan Ravelas said in a recent interview.

The US Fed has been pumping cash into the US economy since late 2009 through the purchase of mortgage-backed securities and US treasuries at a rate of $85 billion a month.

The extra money in the US economy pushed interest rates in the US to record lows, forcing investors to leave the traditional safe haven in search of higher yields in emerging markets like the Philippines.

The flood of foreign capital led to record-low interest rates and inflated asset prices in emerging markets like the Philippines, helping corporations expand using cheap money from banks. It also made it easier for households to secure financing to buy new homes and cars.

At their latest auctions, 90-day and 180-day Philippine treasury bills were sold at a rate of 0.001 percent, which was the lowest possible yield the Bureau of the Treasury’s computer systems would allow.

But at its meeting in December—its last for the year—the policymaking Federal Open Market committee (FOMC) decided to scale back the bond-buying program amid signs of an accelerating economic recovery in the US. The unemployment rate in the US fell to a five-year low in November. The American economy also grew at a better-than-expected 3.6 percent in the third quarter.

The US Fed said it would slow down purchases to a rate of $75 billion a month starting January. The prospect of the US Fed’s ultra-cheap money policies coming to an end rocked local markets.

The Philippine Stock Exchange Index (PSEi), which was the region’s best-performing bourse in the first half of the year, erased all the gains it made since the start of 2013 following the Fed’s announcement. The peso touched a three-month low amid heavy selling, although the currency remains supported by robust remittances from migrant workers.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said that while the Fed’s move to scale back starting January came as a surprise—most analysts expected the tapering to happen months later—the announcement should serve as a calming influence on market players.

“While tapering has started, the start was small and nominal; more of a signal than a statement of aggressive monetary stance,” he told the Inquirer.

The bigger question for the BSP in the months ahead would be whether the Fed decides to scale back its asset purchases even more, and if so, by how much.

Speaking to reporters, BSP Governor Amando M. Tetangco Jr. said market players and policymakers would closely watch economic data coming from the US for hints at what the Fed’s next move would be.

“The pace as well as the amount of the tapering at each stage is still uncertain. That continues to lead to volatility,” Tetangco said.

Guingundo said the BSP had more than enough tools to counter any effects that the Fed’s tapering would bring. Many of these tools, he said, were developed during the height of the global financial crisis of 2008, which the Philippine economy was able to weather to come out with positive growth despite a deep global recession.

He said the BSP could choose to adjust the terms of its peso and dollar rediscounting facilities to ensure that liquidity in the economy would not dry up amid increased risk aversion.

Regulatory forbearance can also be exercised to allow smoother adjustments by banks in the event of excessive capital outflows. Also, surveillance of risks in the banking system will be enhanced, particularly in terms of network analysis to test vulnerabilities in bank and corporate inter-connectedness.

Looking beyond the immediate effects of the Fed’s taper, Guinigundo said the reduced need for monetary stimulus in the US signaled a more sustainable recovery for the world’s largest economy, which also happened to be the Philippines’ largest trading partner.