MANILA, Philippines — The Philippines is among the 10 “troubled” emerging markets that are vulnerable to capital outflows once the US Federal Reserve hikes interest rates and begins withdrawing its pandemic-era stimulus, a global bank warned.
The risk emanates from local yields that have been at ultra-low levels for a long time, as the Bangko Sentral ng Pilipinas maintains its easy money policy to support the pandemic-hit economy. In a report released Friday, Asian investment bank Nomura said the BSP might have “overreached” by flooring interest rates too much that foreign investors are no longer getting enough returns to compensate for a “weak” economic recovery from the pandemic.
This, in turn, could erode investor confidence and easily make them pull out their funds in the event of emerging market panic. Based on Nomura’s research, real policy rates have been negative for 14 months since last year, when the health crisis hit home and sent the Philippine economy collapsing at a record 9.6% rate.
Rounding up the troubled 10 are Brazil, Colombia, Chile, Peru, Hungary, Romania, Turkey, South Africa and Indonesia.
“The Philippines is included in the troubled 10 because it has had a weak economic recovery thus far from the pandemic, rising inflation, a current account deficit that is likely to get larger in coming years and a deterioration in fiscal finances,” Rob Subbaraman, head of global macro research at Nomura, said.
Federal Reserve chief Jerome Powell's address to the annual Jackson Hole symposium of central bankers and economists later Friday will be closely watched for an idea about plans to reduce the bond-buying that has helped support the US economy’s pandemic recovery, though a timetable is not yet expected. Already, paranoia is high over a possible repeat of “taper tantrum” in 2013, which saw Asian markets panicking when the Fed announced it would undo its economic stimulus campaign following the 2008 financial crisis.
Analysts say the timing of the taper is crucial as it could also give an indication of when to expect interest rates to go up. Still, three leading Fed officials have called for the bank to begin winding down soon.
Twin deficits
Should the Fed start its first post-pandemic tightening earlier than expected, the risk for the Philippines is that the BSP may be forced to follow suit to keep local yields competitive and stem capital outflows, all while the economy still needs support to recover from the pandemic.
But BSP Governor Benjamin Diokno believes the Philippines can withstand capital flight because, unlike in past crises, the country “has come a long way” and is currently sitting on hefty dollar reserves amounting to $107.15 billion as of July. These buffer funds are forecast to hit a record $115.0 billion this year, before reaching $117.0 billion in 2022 based on the BSP’s latest projections.
Indeed, Nomura’s Subbaraman said the Philippines is “well covered by reserve assets”. But he warned that the biggest risk for the country is the looming return of the so-called “twin deficits” — which happens when an economy has both current account deficit and budget deficit.
In the Philippines’ case, the twin deficits are driven by improving private spending as the economy reopens and higher public spending on coronavirus programs. This, in turn, may erode the country’s dollar reserves and weaken its defenses against external shocks, Nomura said.
“For many EM (emerging market) countries, we expect sizable current account deficits to re-emerge which, alongside still-large fiscal deficits, will lead to twin deficit challenges for EM policymakers,” Nomura said. — with a report from AFP