Should the Philippine economy worry

According to the Institute for Development and Econometric Analysis, Inc. (IDEA) latest Economic Monitor, news from abroad continued to roil financial markets, triggering upward pressure on interest rates and a weaker peso that could contribute to inflation further down the road. After the Federal Reserve’s comments on a possible winding down of quantitative easing given a strengthening United States (U.S.) economy late last May, investors continued to digest the news in June and the sell-off continued amidst a global rebalancing towards the U.S. While adjustments are seen in the short-term, i.e. peso depreciation and higher short-term interest rates, outcomes are not likely to change radically going further given the fact that the U.S. economy remains fragile despite the incipient recovery.

Per IDEA, the peso continued to weaken against the dollar in June, to settle at PhP42.9:USD1.0 from PhP41.3:USD1.0. This is still an offshoot of the turbulence in financial markets spooked by signals from the Fed. Meanwhile, the monetary policy stance of the Bangko Sentral ng Pilipinas (BSP) remains accommodative and supportive of domestic economic growth, and is seen to hold steady in the short term with the central bank allowing the currency to depreciate.

The BSP is likely to step in, however, to smooth out excess volatility even as it reassures the public that the country’s economic fundamentals remain sound notwithstanding swings in the financial markets. Moreover, it argues that the possible winding down of quantitative easing signals a stronger U.S. economy, which will in turn bode well for Philippine exports—allowing the exchange rate to adjust by itself in the long-term through the market mechanism.

As per same published report, the increase in consumer prices held steady last month, as the inflation rate remained unchanged at 2.6 percent. The low-inflation environment was supported by a deceleration in key sub-indices, notably tobacco and alcohol products. While still elevated, the rate of increase in the prices of these “sin” products slightly decelerated to 31.1 percent from 31.4 percent. Food and beverages and housing, electricity, gas and water also picked up. These were offset by declines in clothing and footwear and house furnishings and maintenance. The rate of inflation in Areas outside the National Capital Region (NCR) also continues to outpace that in the NCR.

For the Philippines, a more significant question is whether this shift in the Fed’s policy can choke off its growth momentum. The least is that the economy is likely to feel some pressure. The stock market has been suffering from the outflow of funds. Share prices continue a downturn since May 23, re-versing any wealth effect. Moreover, the peso to dollar exchange rate started to become extremely sensitive. Treasury yields in the US has been peaking and this encourages purchases of the dollar. If sustained, the depreciation of the peso against the greenback could further promote the flight of capital, make it more difficult for the government to service foreign debt, and cause imported inflation to swell.

Nonetheless, the robust domestic economy can lower the odds of financial market stress as some investment leaves the country. Moreover, the latest stock of US$82.892-billion foreign currency reserves, which can pay for imports for about 12 months and is equivalent to about 10 times the country’s short-term foreign debts based on original maturity, and the stable inflow of overseas Filipino remittances can be a source of stability in the exchange rate. Economies execute their own exit plans. Moreover, it will be a tight competition for capital if US really pulled off an exit strategy successfully, according to researchers of IDEA.

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