Market sell-offs to have ‘moderate impact’

MANILA, Philippines - Financial market sell-offs are expected to have a “moderate impact” on the Philippines, which does not need to resort to controls to prevent capital from leaving, the International Monetary Fund (IMF) said.

“The sell-off in risk assets has not been unique to the Philippines and has been (occurring) across all emerging markets (EMs), including Asia,” IMF resident representative Shanaka Jayanath Peiris told The STAR in an e-mail.

“However, the impact may be more contained in the Philippines than in many other emerging markets because ample international reserves exist to meet portfolio outflows,” he added.

Portfolio placements in the local financial markets dropped to a net outflow of $640 million in May, the largest on record, on what has become the start of huge market sell-offs that continued this month.

Investors have been worried cheap money from $85 billion worth of monthly bond purchases by the US Federal Reserve would soon end, as the US economy recovers, helping push interest rates up.

As fund managers shift their money from emerging markets to the US, Peiris said financing costs for some corporations, especially those in the stock exchange, may rise, making it quite difficult to secure funding for investments.

On Thursday, the Philippine Stock Exchange index, one of the world’s best performers, plummeted 6.75 percent, the biggest single-day drop since October 2008. It recouped more than two percent of those losses last Friday.

Stocks, however, are just “held by a small share of the population,” Peiris said, and thus the sell-off may have “limited impact” to over-all consumption. Consumer spending accounts for 70 percent of the Philippine economy.

“Banks are also well capitalized and liquid, and could step in to finance investment plans,” the IMF official said.

“Deleveraging from risk assets should thus only have a moderate impact except possibly on a few leveraged corporates reliant on external funding,” he pointed out.

The peso, meanwhile, may very well be supported by $82-billion in reserves to “smoothen excessive volatility.” Billion-dollar monthly remittances, whose value rises due to weak peso, could also serve a boost.

The peso has weakened by nearly five percent versus the dollar since its last trading day in 2012. It sank to a low of 43.20 to $1 last June 11 before bouncing back to end trading at 42.81 last Friday.

Should the situation turn from bad to worse, Peiris said the central bank has the flexibility to respond to capital outflows. “But there would seem no need for capital flow measures at the current juncture given the comfortable external position and resilient banking system,” he said.