Heightened investor worries could prove challenging for the Philippines, Nomura Global Economics said, with capital outflows putting pressure on the peso and the country’s balance of payments (BOP).
Concerns that global developments could particularly affect remittances, however, are “overblown,” Nomura said in a new report.
It identified the impact of lower oil prices on remittances, increased financial market volatility, concerns over China and the impact of US Federal Reserve rate hikes as among the factors that have led to both foreign and domestic investors seeking safer havens.
Capital has been redirected to US bonds, it noted, and outflows also recorded in the stock market—“possibly exacerbated by valuation concerns amid global risk aversion.”
“With our US economics team’s forecast of two more interest rate hikes from the Fed in 2016 and our below-consensus forecast for China’s growth (5.8% in 2016), the risk is that subdued risk appetite may continue to pressure the Philippines’ BOP via capital outflows,” Nomura said.
The Philippines, it noted, “appears to be a victim of its own success: strong investment spending has kept capital goods imports elevated while higher tourism imports (Filipinos traveling overseas) have increased, possibly due to higher per-capita incomes.”
“Although strong domestic growth prospects have indeed led to FDI (foreign direct investment) inflows, FDI outflows have picked up amid global risk aversion,” it noted.
However, Nomura said the concern that lower oil prices could affect remittances, as many overseas Filipino workers (OFWs) are based in the oil-producing Middle East, should be discounted.
The Middle East-based OFWs most vulnerable to losing their jobs, it noted, are in the semi- and low-skilled categories with relatively low per-capita remittances. Also, terms of trade benefits will help offset the impact of lower oil prices on remittances, Nomura added.
Structurally, it said a survey of OFWs showed remittances had become geographically diversified, the share of in-demand skilled workers in service sectors had increased, and that higher per capita remittances reflected an increased proportion of higher-income workers.
Overall, Nomura said the current account surplus could narrow to 3.7 percent of gross domestic product (GDP) this year from 4 percent in 2015. OFW remittances, however, were forecast to grow by 5.2 percent from 3.5% in 2015.
“That said, global and local factors continue to contribute to BOP vulnerability. In our scenario analysis, we find that PHP remains vulnerable if capital outflows continue at its pace from over the past 12 months,” Nomura said.
GDP growth is expected to accelerate to 6.5% this year from 5.8% in 2015, Nomura said, thus “we remain long PHP against our otherwise long USD/Asia portfolio.”
“However our position remains small and will remain so until global factors favor capital inflows into the Philippines,” it qualified.