Philippines confident in face of EM storm

Senior officials in Benigno Aquino’s administration argue they can help keep the Philippines’ growth story on track even as other Asian markets face capital outflows.
Rosalia De Leon, treasurer of the Philippines in its department of finance, says GDP growth rates are on track to reach 5.5%-6.0% this year, with inflation low and stable.
Rosalia De Leon, treasurer of the Philippines in its department of finance, says GDP growth rates are on track to reach 5.5%-6.0% this year, with inflation low and stable.

Last week’s turmoil that rocked emerging-market equities and currencies had a relatively muted impact on the Philippines, and government officials remain upbeat on the country’s growth story.

“We are the only [Southeast Asian] country with its growth forecast intact,” says Rosalia De Leon, treasurer of the Philippines in its department of finance, noting that the country recently achieved investment grade status from Standard & Poor’s and Fitch. She says GDP growth rates are on track to reach 5.5%-6.0% this year, with inflation low and stable.

Diwa Guinigundo, deputy governor for monetary stability at Bangko Sentral ng Pilipinas, the country’s central bank, says the momentum remains positive. “There are expectations of a further credit rating upgrade, perhaps in October,” he says.

Last week saw investors pound the Indian rupee, the Indonesian rupiah and many other emerging market currencies amid increasing expectations of a withdrawal of global liquidity. The Philippines was not immune but its financial markets suffered only modest damage.

New data from the US showing its economic recovery is on track raises the likelihood that the Federal Reserve will slow down, and ultimately end, its program of asset purchases and potentially raise interest rates.

The recent era of easy money drove down yields in developed country bond markets, sending money to emerging market securities. The end to easy liquidity, however, is expected to reverse those investment flows, and emerging markets have experienced volatile conditions since May when the Fed first voiced its intentions.

The Philippines differs from many emerging markets in that its current account and its central government’s fiscal account remain in surplus. Its economy is less tied to China, and more to the US, thanks to its rising industry of call centres and business outsourcing.

The country’s capital markets have not been as open, either, so there is less foreign capital to flee. Its local currency bond market is small compared to others, with the US dollar equivalent of $100 billion outstanding, out of a regional local currency market total of $7 trillion, according to figures from the Asian Development Bank.

This is about 36% of GDP, while other countries have much bigger bond markets: Thailand’s bond market is about 70% of GDP, and Malaysia and Korea’s markets are more than 100% the size of their economies, according to Ng Thaim-hee, senior economist at the ADB. And very little Philippine debt is held by foreigners, whereas more than 30% of Malaysian and Indonesian debt is.

Ng and the government officials spoke at FinanceAsia and The Corporate Treasurer’s annual corporate funding event in Manila last week.

Ng says yields are rising across Asia but not in the Philippines. “It is the least affected by the Fed’s action,” Ng says, except for Vietnam – which foreign investors have long since abandoned. “The peso has been stable.” Contrast that to Indonesia, where government bond yields have widened by 220 basis points over the past two months, he says, and the currency has fallen by 15% in the past two weeks.

“Unlike the rest of Asean, the Philippines’ external balances are improving, not deteriorating,” Ng says.

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