PH fundamentals to limit large-scale economic impact
An expected economic downturn in the eurozone after the United Kingdom voted to leave the European Union may threaten Filipino remittances and the peso, but sound macroeconomic fundamentals are seen likely to limit any larger negative impact on the Philippine economy.
By late Friday (in Manila), the United Kingdom’s “Vote Leave” campaign has secured more than majority of the vote. The pound has collapsed and world stock markets have descended into pandemonium after Britain’s shock vote to leave the EU fueled global uncertainty, reported Agence France-Presse.
For the Philippines, the fallout would be felt more in the financial markets, said Nicholas Antonio Mapa, associate economist at the Bank of the Philippine Islands (BPI).
“The Philippines will be affected mainly on the financial market channel as we are susceptible to financial market volatility—sell-offs in stocks, bonds, and weakening of the peso,” Mapa said.
In the wake of the vote, the Philippine peso weakened to a seven-week low against the US dollar, shedding 42 centavos to close at P46.95 to $1 from its P46.53 finish on Thursday, the lowest level of the local currency since reaching P46.96 to $1 on May 2.
Total transactions rose to P621.5 million from P591 million in the previous session.
BSP watching currency moves
“As expected, the US dollar and yen benefited as safe haven currencies. While regional currencies are down, the peso remained in the middle of the pack,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr., said in a text message to reporters.
“We can expect more volatility in domestic markets in the near term,” he added.
Tetangco noted that even as direct Philippine exposure to the UK is relatively small, the central bank will be watching the impact on the local economy via contagion from moves in US dollars.
In the medium term, he said monetary authorities would watch developments as the rest of the EU reacts to Brexit.
“BSP is ready to provide liquidity to our market as needed. But we don’t see any need to change our stance on monetary policy at the moment,” he added.
Meanwhile, BSP Deputy Governor Diwa Guinigundo said Brexit is unfamiliar terrain for the UK, which shared many years of important trading and investment linkages with the rest of the Europe.
Hence, such an “annulment” could bring about unwanted consequences on both the real sector and the financial markets on both sides of the English Channel, he said.
This, according to Guinigundo, is driving the sharp volatilities in both the equities and financial markets.
“The dynamics of capital flows from emerging markets is also likely to be affected and hence, we would be feeling the fallout as we did today when the Asian regional currencies dropped precipitously and equities markets profusely bled,” he said.
Philippine share prices fell by more than a percent on Friday, tracking Asian markets as many investors opted to liquidate their positions after the results of the British vote to leave the EU.
The benchmark Philippine Stock Exchange Index (PSEi) tumbled by 1.29 percent or 100.06 points to end the week at 7,629.72, while the wider All Shares index declined by 1.21 percent or 55.80 points to settle at 4,542.64.
Victor Immanuel Felix, equity research analyst at AB Capital Securities Inc., said that the main board’s drop was merely an immediate reaction by investors who were caught by surprise by the result of the Brexit referendum.
“A lot of investors were already positioning themselves on the assumption that UK would vote to remain with the EU. Now, the result caught them by surprise. This drop was only an immediate reaction from the market,” Felix said.
Further, Felix noted that most of the investors who dumped their shares in the local bourse are Filipinos, pointing out that Friday’s net foreign buying was still healthy at P1.224 billion.
Astro del Castillo, president and managing director of First Grade Finance Inc. agreed with Felix’s view, saying the market was “overwhelmed” by the UK referendum result.
“Basically, the market was overwhelmed by the sell-off triggered by news on results of the referendum in Britain. It triggers a sell-off among investors although there is no direct impact on the Philippines,” del Castillo said.
“There will be a sell-off as long as uncertainty persists,” he added.
Jonathan Ravelas, BDO Unibank Inc.’s chief market strategist, explained that the stock market bowed to profit-taking following a high of 7,813.58 in early Friday trade.
“Risk-off trades and increased volatility due to the referendum in the United Kingdom triggered liquidation activities, causing investors to capitalize on their gains from the recent rally,” Ravelas said.
Joey Cuyegkeng, ING Bank Manila senior economist, said financial markets have been quite volatile and the Brexit showed Friday’s trading followed a significant risk-off sentiment.
Going forward, he said slower UK-euro zone growth, and likely slower growth for the global economy overall is expected after Brexit.
“But major central banks and major government are likely to moderate the impact of Brexit,” he said.
The economist noted that the Philippines’ exposure to the UK involves 5.6 percent of total overseas Filipino workers’ (OFW) remittances as of 2015, but trade with the UK is quite marginal.
“A slowdown in UK would have some impact but we expect such to be marginal. Once the dust settles, we expect Philippine economic fundamentals to eventually exert some strengthening pressure on the peso,” he said.
But he stressed that a significant slowdown in the euro zone as a result of Brexit would have a more significant impact on the Philippines.
He said Europe accounts for 15.5 percent of total OFW cash remittances in 2015, with exports to Europe accounting for 12.6 percent while imports from Europe account for 11.4 percent of total imports.
However, Ernesto Pernia, incoming socioeconomic planning secretary and director general of the National Economic and Development Authority (NEDA), downplayed the potential risks posed by Brexit.
He said Brexit would not affect the Philippines’ trade or investments with the UK as the effects of the separation with the EU would only be on their part.
“There is no direct impact [to us]because we’re not really affected. We’ll continue with our trade with the UK so it’s not a problem. And the trade with Europe will also continue,” Pernia said.
“The direct impact is on Britain and the European Union, not on us,” he stressed.
Henry Schumacher, vice president of the European Chamber of Commerce of the Philippines (ECCP), agreed, saying the euro zone may have some readjustments with the exit of the UK, but that the impact would not be greatly felt elsewhere.
“Europe will have to restructure but I don’t see the Philippines being substantially affected,” Schumacher said.
Also, Justino Calaycay, A&A Securities Inc. marketing and research head, said it will take about two more years before the UK it is able to “fully exit” the euro zone so the disruptions, if any, could be gradual.
“Having said that, it has been voiced by not a few analysts and observers that the resulting exit of the UK from the EU won’t create much of a stir in the Philippines, economic-wise,”
“Its impact beyond shared sentiments with our peers will be minimal. We can further strengthen our bilateral trade with the UK when it steps out of the EU,” he added.
Optimistic longer-term outlook
ING’s Cuyegkeng noted that the UK-EU disengagement period would be when the next impact would be felt as negotiations would tackle trade, investments and other issues.
But he reiterated that the Philippines’ economic fundamentals are strong and it “also has significant economic policy leeway (monetary and fiscal leeway) to counter adverse global challenges that could result from Brexit.”
ING believes that the economy can withstand such external developments, with higher fiscal deficit spending focused on higher infrastructure spending and with greater disposable incomes likely keeping Philippine economic growth in the area of 6 percent to 7 percent.
“Structural inflows are likely to remain high with a modest impact from Brexit on the assumption that economic policy makers in other economies including host economies would implement counter measures to offset the chances of a significant slowdown,” he said.
The BSP’s Guinigundo reiterated that monetary authorities are closely monitoring the foreign exchange market and remain prepared to act in order to ensure orderly transactions and smooth out the wild volatility, and that the BSP is confident that the flexible exchange rate regime would be able to absorb the adjustments should they be necessary.
“After all, the market should be assured of the strength of the Philippine macroeconomy and the banking system as well as the comfortable level of the country’s foreign exchange reserves and the dollar deposits in the banks,” he added.