The Philippines, along with emerging Asian economies, is looking slightly vulnerable, particularly its currency exchange rate system, when the United States’ Federal Reserves moves to raise its key policy rates, credit ratings agency Moody’s Investors Service said.
“With the US Fed on standby to start raising interest rates, most likely within this year, there is some potential for capital outflows from emerging Asian economies,” Moody’s said in its Sovereign Outlook – Asia Pacific report released on Thursday.
The ratings firm pointed out that while the Philippines would benefit from an acceleration in US economic growth, it would also be slightly more vulnerable to a disorderly market reaction to US interest rate hikes.
“Approximately 37 percent of Philippine government debt is foreign currency-denominated, exposing it to exchange rate depreciation,” it said.
Moody’s compares the Philippines with India and Indonesia, which, it said, have so far faced less currency pressure than they did during the 2013 “taper tantrum.”
“Both countries’ foreign exchange reserves have risen and their nominal effective exchange rates have been quite stable,” the ratings firm said.
Nonetheless, Moody’s expects no significant sovereign credit distress in the Philippines even if global liquidity were to tighten substantially, given compensating factors such as its current account surplus.
Holding a contrary view, Bank of the Philippine Islands (BPI) Vice President and lead economist Emilio Neri Jr. does not rule out contagion from the equation.
“While Philippine economic fundamentals are one of the best in the region, we cannot count out the possibility of contagion emanating from a selloff in asset markets in other, more vulnerable emerging market (EMs) economies,” Neri said in an e-mail to The Manila Times.
Despite this, Neri said that global fund managers who may suffer from losses in vulnerable EMs may decide to liquidate assets from “less vulnerable” economies like the Philippines as a way to protect their bottom line.
“They are forced to sell their good assets to compensate for losses they incur from the bad ones. In other words, collateral damage may be unavoidable in the event of an unexpected financial disaster emanating from policy normalization in the US,” he explained.
But the BPI economist expressed his confidence that the country’s economic managers have the means and resources to ensure that the situation remains manageable in such unexpected events.