Domestic impact expected to be limited


The US Federal Reserve’s decision to raise policy rates may affect the peso but overall the move will be constructive for emerging market economies like the Philippines, the Bangko Sentral ng Pilipinas (BSP) governor said.

Economic managers said the country’s solid fundamentals would provide a buffer against the Fed lift-off’s impact, a view shared by debt watcher Fitch Ratings.

Following announcement that the US central bank had finally raised interest rates for the first time since 2006, the peso dropped to a new six-year low against the dollar.

The currency closed at P47.39 to $1, losing 4 centavos from Wednesday’s P47.34.
Thursday’s finish was the weakest since November 6, 2009 when the peso slid to P47.20:$1.

“The Fed’s action brings an end to the lift-off uncertainty,” central bank Governor Amando Tetangco Jr. said in a text message to reporters on Thursday.

He said markets could see US yield curves flatten, which would be positive for emerging market economies (EMEs) with exposures in the long end or were planning to tap the sector for funding.

“The regional currencies have already moved lower versus the US dollar in recent weeks. This may continue, as would the outflows, but possibly not in significant magnitudes as in the past,” Tetangco said.

“The Fed promised gradual hikes. That may be be further moderated as the US enters an election year,” he added.

On balance, Fed action should be constructive for EMEs, Tetangco claimed.

The National Economic and Development Authority, meanwhile, said the impact of the Fed lift-off would not likely be strong for countries like the Philippines.

“It is not a good thing for those countries that have not kept their macroeco[nomic]fundamentals because they are quite vulnerable to swings in global interest rates and exchange rates but not us, and I think that is one of the major achievements we have made in the last couple of years,” Socioeconomic Planning Secretary Arsenio Balisacan said.

The Department of Finance expressed confidence that the domestic economy would remain resilient given its strong external position, which includes a current account surplus and ample foreign reserves.

“As we have long watched this development closely, today’s lift-off will not change our financing plans. We have taken care to do our homework: for example, our general government debt to GDP [gross domestic product]ratio is now at 36.2 percent from 44.3 percent in 2009,” Finance Secretary Cesar Purisima said.

Purisima added that if the lift-off was an indication of a stronger US recovery, it bodes well for the Philippines as the US is one of its largest trading partners.

“Moving forward, we will closely watch the pace of tightening alongside other developments in the volatile landscape of the global economy. We will remain opportunistic in our funding strategy, carefully monitoring market developments including further signals for rate path clues,” he said.

Debt watcher Fitch Ratings, for its part, said the external finances of Philippines were a key credit strength.

“In Fitch’s view, steady current account surpluses since 2002 have led to a large build-up in foreign exchange reserves and that makes the Philippines more resilient than many other emerging market economies to any shift in global investor sentiment, following the Fed rate hike,” it said.


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