Nomura flags Philippines’ ‘high vulnerability’ to Trump

Melissa Luz T. Lopez, Businessworld, Jan. 30, 2017

THE PHILIPPINES is among economies in Asia most vulnerable to abrupt policy shifts in the United States, Nomura Global Research said in a Jan. 27 report, saying such impact — in terms of geopolitics, trade and immigration — could weigh on the country’s growth prospects.

The global bank said the Philippines had “high vulnerability” to reforms planned by US President Donald J. Trump, with its impact likely to be strongly felt through the peso-dollar exchange rate, external trade, immigration halts and possible “foreign policy confrontation” particularly over China’s territorial claims in the South China Sea.

At the same time, the Philippines has “medium” vulnerability to capital flight, rising US interest rates and Mr. Trump’s planned fiscal stimulus.

Nomura currently expects Philippine gross domestic product (GDP) growth at 6.3% for 2017 — slightly slower than the 6.8% actually clocked last year but still faster than the expected pace of its neighbors — but may slip to 6.1% should the “risk scenario” involving geopolitical tensions and rising US protectionism prevail.

Locally, the tempered growth projection was attributed to the absence of election-related spending which had otherwise boosted GDP growth in 2016 due to the May 9 national polls, although Nomura said this can be “partly mitigated” by increased government spending as the administration of President Rodrigo R. Duterte pushes infrastructure development until it steps down in mid-2022.

Singapore is potentially the most vulnerable to US policy shifts, Nomura said, citing the city-state’s “high” exposure through five channels: rising interest rates, a stronger dollar, external trade, foreign policy and hot money outflows.

In his Jan. 20 inauguration speech, Mr. Trump proclaimed an “America-first” policy characterized by bringing jobs home and tightening the immigration sieve.

Mr. Trump last week signed an executive order that yanked the US from the Trans-Pacific Partnership, effectively loosing ties with Asia, and said he would negotiate “one-on-one” trade deals with other economies instead.

He also signed an order Friday that stopped the entry of citizens of Iran, Iraq, Libya, Somalia, Sudan, Syria and Yemen for the next three months in a bid to fortify the immigration system against potential terrorists.

“President Trump’s goal to make America great again entails policies that are likely to be overall negative for emerging markets,” read Nomura’s special report that assessed the potential impact of so-called “Trumponomics” on emerging markets.

“Rising US trade protectionism and possible retaliatory measures could intersect with increased foreign policy tensions.”

The risk scenario factors in possible downturns in Philippine exports to the US, alongside weaker remittances coursed through the world’s biggest economy that accounts for a third of total worker remittances. Business process outsourcing — whose sales have been growing faster than worker remittances — could also take a hit should US firms heed Mr. Trump’s calls to keep jobs home.

However, Nomura flagged geopolitical tensions as “the biggest threat” to the Philippines’ growth outlook.

“Geopolitics poses the biggest risk. Other channels — such as outsourcing receipts and worker remittances — are important but can be offset by large fiscal stimulus,” Nomura economists Euben Paracuelles, Lavanya Venkateswaran and Brian Tan said of the Philippines.

“[R]egional security issues related to the South China Sea put the Philippines on the front line. The potential for further disputes between China and the Philippines may have eased with the Duterte government seeking stronger economic ties with China. However, while President Trump’s stance on this issue remains unclear, his cabinet nominees have said ‘China should not be allowed access to [those disputed] islands,” the report added, referring to statements made by Mr. Trump’s nominee for secretary of state Rex Tillerson and White House spokesman Sean Spicer.

A potential trade war should the US slap higher tariffs on China imports could also spill over to emerging markets.

Despite these developments, the Philippines is expected to be one of four growth “leaders” among emerging markets — alongside India, Indonesia and Peru — with Nomura seeing an above-six percent growth trend over the next few years.

The Philippine economy should remain robust, anchored on domestic demand that is the “strongest” in Asia, coupled with a healthy fiscal account, low leverage, a young workforce, and an expected investment boom, Nomura analysts said. —