When London-based research firm Capital Economics made the surprising forecast that the Philippine peso will further weaken at 58 to a dollar, Budget Secretary Ben Diokno was quick to say that this prediction is “unlikely and totally unfounded”.
Capital Economics attributed its forecast to the local economy’s trade deficit, which was at 171.7 percent to $3.55 billion in July. Last year’s deficit in the same month was only $1.31 billion. The gap affects currency, and Capital Economics said that this was aggravated by Duterte’s “Build, Build, Build” infra program.
Diokno admitted as much, but was positive that the helpful push from OFW remittances, BPOs and foreign direct investments would keep the economy steady.
In general, currencies in emerging markets have been under pressure all year because the US dollar has been gaining strength. But other problems outside of the region are an added pressure.
Patrik Schowitz, a multi-asset strategist at JP Morgan Asset Management, wrote that the currency crisis in Turkey, Argentina and South Africa has negatively affected currencies in emerging markets. He believes, however, that a major factor is the investors’ fear (contagion) that is driving down emerging market economies, including the Philippines.
He also pointed out that geopolitical issues—trade crisis between US and China, Brexit, “messy” US politics, to name a few—are causing problems in emerging market assets this year.
In consideration of the impact of geopolitical risks on portfolios, Schowitz underlines these basic truths: (1) uncertainty can be more damaging than the event; (2) it is often in the currency or the government debt markets where geopolitical risks play out most strongly; and (3) equity markets can prove surprisingly resilient to political turbulence.
Looking at Asia, the currencies of India, Indonesia and the Philippines are experiencing “comparatively mild” weakness. The risk that financial experts are looking at is for this weakness to lead to more selling of equities.
Yet the silver lining is that, while the contagion may run for a longer time, growth remains solid in the rest of Asia and outside the region. In the words of Schowitz, there is “little risk of a total meltdown in Asia…the storm will eventually blow over without sinking Asian markets.”
Socioeconomic Planning Secretary Ernesto M. Pernia looks at future growth, as he is positive that the country will be joining the upper-middle-income countries like China, Thailand, and Malaysia by next year, despite of the economic troubles we are experiencing at the moment, namely, high inflation, a wide trade deficit and a weak peso.
Presently, the Philippines is ranked together with Vietnam, Sri Lanka and Indonesia under the lower middle-income group. An increase in GDP by a mere 4.4 percent in 2019, he said, would qualify us to level up.
“Appreciating the rainbow,” as Finance Secretary Carlos G. Dominguez III phrased it, is all good and helpful. There needs to be a balance, however, between positivity and genuine regard for the people as they face economic challenges; between enthusiasm and an acknowledgment of present realities.