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Philippines: moving beyond taper fears

Philippines: moving beyond taper fears Anthony Harrington

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At a recent conference hosted by the Philippines' Chartered Financial Analyst Society, Amando Tetangco, Governor of the country's Central Bank reminded his audience that, despite recent shocks, the Philippines' economy has consistently posted above 6% growth all the way back to 1999. Moreover, the economy has also turned in 60 quarters of consecutive, positive economic growth - something that few (if any) other countries in the world have achieved. What makes this growth story even more remarkable is that prior to 1999 the Philippines was generally referred to as the sick man of Asia.

This growth has been built on solid foundations, the Governor said, because it has been built on domestic consumption and capital formation, and underpinned by low and stable inflation, sound monetary policy and a sound banking system that is well capitalized. The country's banks are capitalized above the central bank's requirement for 10% capital ratios, which itself is two percent higher than the Bank for International Settlements' requirement of 8%.

Another strong point is the fact that the Philippines' current account has been in surplus for 11 years on the trot. Despite the hit taken as a consequence of the emerging market currency wobbles triggered by the Federal Reserve's introduction of tapering, gross international reserves remain more than adequate for the country's foreign exchange requirements, the governor told delegates. Remarkably, at a time when the external debt of advanced countries, particularly as far as the US and the UK are concerned, has been marching ever upwards, the Philippines saw its external debt decline from 60% to 20% of GDP by 2013.

Tetangco considered three potential threats to this rosy picture, namely potential price shocks, increased tapering by the US Fed and concerns over the rapid growth in domestic liquidity and credit, which could lead to overheating in the economy.

He argued that the Philippines could now definitely say that it had managed to put the unwelcome label of "the sick man of Asia" behind it. Bond market investors appear to agree. As a recent Bloomberg article makes clear, credit default swaps (CDS) ratings for Philippines sovereign debt have dropped by 87.8 basis points through 2014. To put this in context, the current CDS spread on the Philippines is only 0.3 basis points higher than Malaysia's, which has an A-rating from Standard & Poor's (S&P), two levels higher than the Philippines BBB rating.

Having raised the Philippines' sovereign debt rating to investment grade in early 2013, S&P raised it another notch in May 2014. Commenting on Bloomberg television on 22 May, Philippines President Benigno Aquino said that he was optimistic that Moody's and Fitch would soon follow S&P in designating the country's debt as investment grade. "We believe the fruits of our labors are manifesting themselves," he said.

To keep the Philippines on this onward and upwards track, Tetangco promised that the central bank would do everything required to contain inflation and deal with any price shocks that might materialize. He told his audience that: "We will not hesitate to act pre-emptively."

Where money fled the Philippines (along with other emerging markets) after the Fed first announced it was considering tapering in the latter part of 2013, Tetangco claimed that the country was now once again seeing capital inflows. That said, he admitted that the outflows had continued through the first quarter of 2014, so the turnaround is very recent. If things get wobbly again, perhaps through the Fed's stepping up of tapering in the light of favorable economic results, the central bank "would not hesitate to deploy contingency measures", he said.

He indicated that the central bank would lean against sudden falls in the value of the peso through intervention, "because market participants often get ahead of themselves", but reaffirmed his policy of broadly letting the market set the FX rate.

However, Tetangco has an excellent grasp of the realities of international investment and the risks these realities pose to emerging markets like the Philippines:

"The global investor is hard-wired to be binary – he is either risk ON or risk OFF. Depending on the balance of risks between AEs and EMEs, funds can move across markets swiftly and in surges."

In the near term, what happens to the Philippines stock market and FX rate will be dominated by these external "waves and surges" and the Philippines will just have to roll with it. But it can do so with the confidence that comes from knowing that the economic fundamentals are sound, he concluded. Time will, of course, tell if his confidence is justified...

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Tags: advanced economies , Amando Tetangco , Benigno Aquino , capital ratios , emerging economies , peso , Philippines , tapering , US Federal Reserve
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