S&P cites risks amid global recovery

THE GLOBAL economy is on the road to recovery this year, but the continued surge of volatile capital inflows to Asia could threaten the region’s growth prospects, a credit rater said.

“Standard & Poor’s (Ratings Services, or S&P) is less pessimistic about global credit conditions than it was just a few months ago. Global economic prospects have improved mildly, and risks have eased, in our view,” S&P said in a report released yesterday.

Policy actions by the European Central Bank and the US Federal Reserve have mitigated risks and put their respective economies on more solid footing, it explained.

The US has seen its housing market strengthen, while the Eurozone is expected to climb out of recession by the yearend.

“Still, although risks have receded, they have not dissipated entirely. The US ‘sequester’ negotiations and potential postponing of difficult fiscal decisions continue to loom over the US economy,” S&P noted.

“The question of whether the Eurozone would be able to build on the progress it has made in addressing its sovereign and banking sector crises remains.”

China could also see a correction in its investments that could spiral into an economic downturn, while Brazil’s growth could disappoint, dragging down the rest of South America.

DIRE EFFECT
More importantly, the debt watcher said, the policy responses of advanced economies are having a dire effect on emerging markets in Asia.

“Highly expansionary monetary policies in advanced economies are spurring very strong capital flows into Asia Pacific, which can just as quickly exit if conditions improve closer to home,” it noted.

As interest rates are slashed to near-zero in the US and Europe, foreign investors have flocked to countries like the Philippines in search of better yields.

These capital inflows mostly come in the form of portfolio investments — placements in local stocks and bonds — called “hot money” for the ease by which they enter and leave markets.

Hot money hit a 26-month high in January, notching a net inflow of $1.27 billion. A total of $2.81 billion entered the Philippines that month, more than double the $1.213 billion the year before. They were offset by outflows of $1.539 billion, also more than twice the $627.31 million recorded in 2012.

“The volatility and management of these flows is, in our opinion, a risk for many economies in the region…” S&P said.

It warned that hot money could trigger currency revaluation, shifts in import and export flows and competitiveness, inflation, as well as asset and credit bubbles.

There are already signs of “frothiness” in the region, it pointed out, with leveraged finance yields at multi-year lows, corporate bond issuances at record highs and property prices skyrocketing.

Against this backdrop, the Philippines is expected to grow by 5.9% this year, weakening to 5.7% and 5.4% in 2014 and 2015, respectively.

Should downside risks prevail, the country could see growth fall to a measly 3.3%, 3.1% and 2.8%. But should risks in the global economy ease, growth could soar to as high as 7% in 2013 then 6.8% and 6.5% afterwards.

The Philippines grew by a healthy 6.6% last year, beating the government target of 5-6%. It aims to take on a higher growth trajectory in the coming years, eyeing 6-7% in 2013, 6.5-7.5% in 2014 and 7-8% in 2015.

The country, though, has not been insulated from risks of strong capital flows, and Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco has tagged it as the main challenge facing the central bank this year.

The peso has appreciated sharply in recent years, increasing by 6.8% against the greenback in 2012 to close at P41.05. So far this year, it has traded within the P40-to-a-dollar territory. The government’s exchange rate assumption is P42-45.

While the BSP maintains that there is no sign of asset bubbles yet, it has said that there are “pockets of concern” that need to be monitored, such as the rising prices of office property and residential luxury segments. The price-to-earnings ratios of real estate developers have also increasing steeply, the central bank has noted. –Diane Claire J. Jiao, Senior Reporter, Businessworld
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