Country to withstand market volatility

THE PHILIPPINES will be able to withstand the turbulence in financial markets even as sell-offs look likely to continue in the short term, observers said.

“Fitch Ratings thinks the Philippines is relatively well-placed among emerging market peers to absorb current market volatility…,” Fitch Asia-Pacific Sovereign Ratings head Andrew Colquhoun said.

He cited the country’s strong external finances, with the balance of payments (BoP) consistently posting a surplus.

The BoP shows a country’s transactions with the rest of the world. A surplus indicates that more funds flowed into an economy than out, providing a cushion against external shocks.

Last year saw a BoP surplus of $9.236 billion, exceeding the Bangko Sentral ng Pilipinas’ (BSP) $6.8-billion forecast.

“This was one of the factors driving the Philippines’ upgrade to investment grade in March this year,” Mr. Colquhoun noted.

International Monetary Fund (IMF) Resident Representative Shanaka Jayanath Peiris, meanwhile, said all emerging markets had been hit by the sell-off, which was triggered by signals that the US Federal Reserve could start tapering off its stimulus program.

“However, the impact may be more contained in the Philippines than in many other emerging markets because ample international reserves exist to meet portfolio outflows and to smooth excessive exchange rate volatility,” he said.

Reserves — comprised of BSP assets held in different currencies, gold, special drawing rights, as well as the foreign exchange deposits of the government and other state-run firms — were at $82.892 billion as of May. It was enough to cover 11.7 months’ worth of imports and was also equivalent to 9.8 times the country’s short-term external debt based on original maturity and 6.6 times based on residual maturity.

Mr. Peiris added, “Remittances provide an additional cushion as it is very stable, with [the peso] depreciation shielding consumption by raising their domestic purchasing power.”

As investors flee emerging markets like the Philippines in anticipation of the US’ rise, financial markets have been sent tumbling. The Philippine Stock Exchange index (PSEi) closed at 6,242.26 last week, well off from the record-high 7,392.2 hit on May 15. The peso has also fallen and is now in P43 per US dollar territory after spending most of the year so far in P40-41 levels.

The BSP, Mr. Peiris noted, has enough tools to respond “flexibly” to any instability.

Central bank Governor Amando M. Tetangco, Jr. last week said the markets’ movements were part and parcel of a shift in the assessment of global risk. Investors, he also claimed, can “get ahead of themselves.”

BPI Asset Management, in a report, forecast that foreign investors could continue pulling out money over the next two weeks.

In the last sell-off — in August 2011 when the US credit rating was downgraded — about 34% of foreign funds, totaling $592 million, exited the Philippines, it said on Friday.

To date only 25% of foreign funds have been taken out, it noted, amounting to $477 million.

“Using the sell-off period in August 2011 as a basis of comparison, we believe foreign selling will continue for another 12 trading days…,” the bank said, adding the PSEi could fall to as low as 5,900 in the correction.

The Philippines saw the sharpest correction in Asia but BPI Asset Management said this was “not a surprise” given high valuations compared to the rest of the region.

It noted that the jitters may only subside after the Federal Reserve’s June 18-19 policy meeting. Markets are waiting whether the US central bank will announce that it will dial back a $85-billion monthly bond-buying program amid improved growth, consumer confidence, employment and housing numbers.

BPI Asset Management said the Fed’s stimulus program may not be scaled down until the third quarter, with inflation low and unemployment still high.

“Any tightening now of monetary policy will run the risk of derailing the economy’s recovery specially if we take into consideration that fiscal tightening (equivalent to 2% of gross domestic product) will make its full impact by the second half,” it said.

Moreover, BPI Asset Management was optimistic that foreign investors would return to the Philippines, retaining its forecast of 7,500-7,700 for the PSEi.

Strong economic growth, low inflation and healthy public finances continue to make the country attractive to investors, it said. Corporate earnings are also expected to rise by 22% and 14% in 2013 and 2014, respectively.

Consultancy GlobalSource Partners, meanwhile, said investors needed new reasons to come back to the Philippines.

“With the upgrade to investment grade already achieved and no clear further upside play, foreign players appeared to have decided to cash in earnings…,” it said in a report.

Economic growth, while outpacing the rest of Asia at a stunning 7.8% in the first quarter, may have been bloated by election spending, GlobalSource added. –Diane Claire J. Jiao, Sub-Editor, Businessworld

A private sector-led real property boom will also need two to three years to complete – See more at: http://www.bworldonline.com/content.php?section=TopStory&title=Country-to-withstand-market-volatility&id=71919#sthash.8ICQjHNw.dpuf