Mixed views on Fed action

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The Bangko Sentral ng Pilipinas (BSP) on Thursday said that the latest move of the United States (US) Federal Reserve regarding its bond-buying program reduces market uncertainty over emerging markets (EMs) like the Philippines.

However, ING Financial Markets (ING) said on Wednesday that it sees EMs declining within the year, as the United States economy has started to regain ground and the Chinese economy seems to be sputtering.

The US Fed’s move to taper bond purchases is a sign that the world’s largest economy is recovering.

“The Fed’s move, which was widely expected, helps to take out one element of uncertainty in the markets,” BSP Governor Amando Tetangco Jr. said in a text message to reporters following the announcement of the Fed’s latest tapering on its quantitative easing program.


The Fed decided to taper its bond-buying program by another $10 billion, to $65 billion a month beginning in February on the account of continued confidence in the US economic recovery.

In the Fed’s latest meeting, Chairman Ben Bernanke agreed to a second tapering, following on a December 18 decision to cut its monthly asset purchases to $75 billion a month in January.

“When the dust settles, we hope the markets would distinguish among emerging market economies, which have weak current accounts, and those that have strong fundamentals such as Philippines,” Tetangco said.

The BSP governor is referring to the robust the current account of the country, which in the third quarter of 2013 registered a surplus of $3.2 billion, equivalent to 5 percent of the gross domestic product.

The continued strong performance of the current account was attributed to the higher net receipts of secondary income and services, along with the reversal of the primary income balance from net payments to net receipts. These factors more than offset the higher deficit in trade in goods.

Current account is one of the components of the country’s balance of payments, which summarizes the country’s economic transactions with the rest of the world during a period.

“In the meantime, our domestic market participants would be well-served if they continue to keep their eyes on the fundamental story of the country,” Tetangco added.

Contrarian views
On the other hand, analysts said that the latest Fed tapering is expected to further affect the investors’ confidence in emerging markets like the Philippines.

“That was expected. It could but we should be mindful that the Philippine fundamental remains strong,” said Jonathan Ravelas, chief market strategist of Banco De Oro.

April Tan, president of Chartered Financial Analysts Institute-Philippines also shared the same view, saying that the problem lies in the low interest rates in the country.

“Seems like it is. As far as Philippines is concerned, it’s the low interest rate that is the problem. There is nothing wrong as far as the economy is concerned,” Tan said.

The government announced that Philippines remains as one of the best performing economies in the Asian region, growing by 6.5 percent in the fourth quarter of 2013, placing the full year gross domestic product growth to 7.2 percent.

In a press briefing, ING Manila Director and Senior Economist Joey Cuyegkeng said that emerging markets like the Philippines, India and Indonesia, among others, will have slower gross domestic product growths within the year, as investors look more on the improving US and European markets

“There will be this ugly episode in the development of the emerging markets, but not a major crisis,” Cuyegkeng said, citing that the Philippines can’t withstand the emerging markets’ decline, unless the market stabilizes which will garner reactions from investors.

“Slowdown in China [market]had serious implications in the emerging markets. Risk events [to pull down growth]can’t be forecasted. And it’s unreasonable for investors to expect a major [risk]event [in emerging markets],” he added.

The economist said that investors will be reacting depending on the countries’ market statuses.

“If the tapering in US will be steady in the second half of the year, [interest rates and inflation]will be more steady.

But we view it as a steady taper,” Cuyegkeng said, referring to the move of the US Federal Reserve to taper its bond-buying program by another $10 billion per month starting in February.

Cuyegkeng noted that the government should improve infrastructure spending to further boost economic growth.
He added that the private-public sector partnership or PPP projects are a plus factor to the economy.

Meanwhile, ING also sees a hike in the policy rates of the BSP in connection with the rising interest rates and inflation for the whole of 2014, compared to the 3-percent average inflation rate last year.

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