A new economic order is brewing in the horizon, and this is perpetuated by a more nationalistic stance of the Trump administration in the United States. President Donald Trump’s effort to boost employment and protect the largest economy’s share in global trade has resulted in a generally strong US dollar.
Economists fear that the contagion from the ongoing US-China trade war, along with the recent currency crunches in Turkey and Argentina, could spread to other countries, particularly the emerging markets.
The good news is that the Philippines is one of the least affected markets by this emerging trade realignment, given its less reliance on merchandise exports and its large currency buffers in the form of gross international reserves (GIR).
While the peso depreciated 8 percent so far this year, the weaker currency actually benefited the families of millions of overseas Filipino workers and provided a lift to the business-process outsourcing sector, which partially depends on the exchange rate for its competitiveness.
Nomura, a Japanese financial institution, identified the Philippines as one of the emerging markets with almost zero risk to currency war. The bank, in a recent global study, cited the need for emerging markets to adjust to the new alignment of economic order. The study used the Damocles index to assess the risk of exchange-rate crises over the next 12 months across 30 emerging markets.
It identified seven emerging- market economies that are most vulnerable to contagion from currency crunches, and the list included Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine.
Nomura described the index as an early-warning system, as it is based on macroeconomic and financial variables. Sri Lanka was listed as having the most risk, with a score of 175, on a scale of zero to 200. A score above 100 represents vulnerability to exchange-rate crisis in the next 12 months, while an index above 150 indicates a crisis is about to erupt any time.
The Japanese bank said Sri Lanka had the worst score because of its weak fiscal finances and a very fragile external position. In terms of GIR, Sri Lanka had reserves of less than five months of import cover and high short-term external debt. South Africa had a score of 143; Argentina, 140; Pakistan, 136; Egypt, 111; Turkey, 104; and Ukraine, 100.
The Philippines, along with seven major emerging markets, had a score of zero, which means we face little risk of a currency crisis. The Philippines was grouped with Brazil, Bulgaria, Indonesia, Kazakhstan, Peru, Russia and Thailand in the list “with very low risk of full-blown crises.”
It is true that the peso hit a 13-year low of around 54.30 against the US dollar this year, but this was mainly due to the general strength of the greenback against most currencies, after the US Federal Reserve began tightening its monetary policy.
Economists also traced the weakness to the rapidly increasing imports, as the Philippines buys more capital equipment to support its economic expansion in the future. Nomura said despite the higher imports, the Philippines’s current- account deficit at 0.8 percent of the gross domestic product in 2017 remained small. It noted that the imports were “largely driven by a surge in infrastructure-related spending that will help unlock the economy’s full growth potential.”
Data from the Bangko Sentral ng Pilipinas showed the Philippines this year incurred a current-account deficit of $3.1 billion in the first half, or 1.9 percent of GDP. The figure was just a fraction of the GIR, which reached $77.8 billion as of August 2018. Such reserves were enough to cover 7.5 months worth of imports of goods and services.
The reserves remain within a comfortable level as they are higher than the international norm of three or four months of imports cover.
Nomura also noted the Philippines’s low external debt to GDP ratio. The country’s external debt, according to the BSP, declined to $72.2 billion as of end-June 2018, from $72.5 billion a year ago. Most of these foreign obligations are long-term loans, which means principal and interest payment are spread across many years.
Nomura noted that the government’s budget deficit has been kept low, thanks to tax reforms that boosted revenue collection. Data showed the budget deficit reached P282 billion in the first eight months of 2018, on the back of a 29-percent surge in spending as the government undertakes massive infrastructure projects. Nomura said while inflation rate rose this year, the Bangko Sentral ng Pilipinas has the flexibility to increase the interest rates, given the strong growth prospects and positive output gap.
The Central Bank has powerful arsenals to counter the rising inflation and further depreciation of the peso. It started by increasing the overnight borrowing rate by 150 basis points to 4.5 percent this year.
Nomura, in general, expects the Philippines to sustain its growth this year with a 6.5-percent expansion. This is consistent with the 6.5-percent prediction by the International Monetary Fund and the 6.4-percent estimate by the Asian Development Bank.
The fact that these reputable institutions see the Philippines growing over 6 percent this year in a new economic order where many countries are expected to suffer from currency crunches speaks of the great resilience of the Filipinos.
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