Nomura: PH among ‘troubled 10’

By Mayvelin U. Caraballo, 28 Aug 2021

JAPAN’S global investment bank Nomura has tagged the Philippines as one of the “troubled 10” in emerging markets (EM) amid the potential of normalizing monetary policy in the United States and China’s weakening economy.

“Bringing together all of our analyses, we now warn of the ‘troubled 10:’ Brazil, Colombia, Chile, Peru, Hungary, Romania, Turkey, South Africa, Indonesia and the Philippines,” it underscored in a report released on Friday.

Nomura disagrees with those who believe that emerging markets are more resilient now than they were on the eve of the 2013 taper tantrum, citing a combination of chronically weak growth, rising inflation and a marked deterioration in fiscal finances as well as the fact that many EM countries’ real policy rates remain deeply negative.

“We believe the economic fundamentals in many EM countries have deteriorated over the past year and are likely to worsen further in the year ahead, heightening the risk of financial crises as global rates rise,” it continued.

The financial institution did not present a separate analysis for the Philippines, although it can be emphasized that the local economy grew by 11.8 percent in the second quarter of this year with an inflation rate of 4.4 percent in the first seven months of 2021.

PH economy faces ‘long-term economic scarring’

In terms of fiscal finances, the first-semester budget deficit-to-gross domestic product (GDP) ratio increased to 7.86 percent from 6.53 percent the previous year as spending growth outpaced tax collection.

“The prospect of the Fed normalizing monetary policy amid China’s slowing economy is a dreadful combination for EM, only to be made worse by the three EM vulnerabilities that we have found lurking in the shadows,” Nomura added.

These vulnerabilities, according to the global bank, include a growing EM bank-sovereign debt nexus, which enhances the possibility of a so-called bank-sovereign doom feedback loop, which was at the heart of the European debt crisis in 2009 to 2010.

It also said the fact that EM has garnered less cumulative portfolio inflows since Covid-19 does not mean it is less vulnerable to significant capital flight.

Not much good news in GDP ‘growth’ result

“Gauged by portfolio liabilities, as opposed to cumulative portfolio inflows, we show how many EMs are likely more susceptible now than on the eve of the 2013 taper tantrum, once asset revaluation effects are taken into account,” Nomura underscored.

It should be mentioned that net outflows of foreign portfolio investments in the Philippines shrank to $444.88 million in January to July 2021 from $3.8 billion the previous year.

“From a saving-investment framework, we demonstrate how EM’s extraordinarily large fiscal deficits will likely leak into sizable current account deficits,” Nomura added.

In the Philippines, the current account is expected to be $10 billion this year, corresponding to 2.5 percent of GDP, up from $9.1 billion previously estimated.