The Philippines appears to be “well placed” to deal with the impacts of the possible tapering of the quantitative easing (QE) program of the United States Federal Reserve, an official at the Bangko Sentral ng Pilipinas (BSP) said.
In a speech at the 5th Annual Corporate Treasury/CFO Summit held last week, BSP Deputy Governor Diwa Guinigundo said that with stronger signs of improvement in the US economy, financial markets are expectedly nervous about the possibility of the US Federal Reserve prematurely reducing its quantitative easing program sometime in 2013.
“The impact of these developments in the Philippines has been immediate and significant, giving us a taste of what could happen should advanced economies begin to withdraw their monetary stimulus, or should emerging economies continue to weaken,” he said.
Guinigundo cited the depreciation of peso to P44 to a dollar level, the wiping out of the stock market’s gains, and the widening spreads of the country’s debt as indicators of renewed uncertainty in global financial markets.
However, he said that the BSP view the asset market effects as a healthy correction that may have helped diffuse the risk of an actual buildup in financial imbalances.
The BSP official added that while recovery of advanced economies is expected to continue to proceed, the transition could prove to be thorny especially if the unwinding proves to be messy.
“We are quite optimistic though that monetary authorities in advanced economies have every reason to launch an orderly and well calibrated exit from QE, in order to preserve their recent gains in output and employment,” he said.
However, Guinigundo stated that the coming months are likely to bring continued external headwinds for the Philippines, and the spillover effects from the external market cannot be set aside.
The BSP official said that while global economic growth remains subdued, encouraging signs of a more solid recovery were now beginning to be seen, which means that monetary policy may also start to normalize, as central banks begin to withdraw the extraordinary measures they have implemented to support growth and financial markets.
“The ball in the air is the timing of the QE exit which may continue to dampen market sentiment and undermine financial performance and stability,” he said.
Guinigundo added that at the same time, the gradual recovery of advanced economies could prove to be beneficial for the Philippines on the whole, especially because the country has strong current account linkages with the US.
“External trade could recover with improvements in demand, while portfolio rebalancing could rekindle market appetite for emerging-market assets and thus continue to channel capital toward the country,” he said.
Moreover, the BSP official noted that the central bank’s strategy to contribute to sustainable growth in the middle of difficult external environment therefore revolves around bolstering the country’s domestic sources of resilience.
“All in all, the Philippines appears to be well-placed to deal with this challenge. The country’s firm growth momentum, manageable inflation environment, buoyant market sentiment, and robust credit and liquidity growth provide us ample policy space to respond appropriately to evolving domestic and global conditions,” he said.