PH currency crash unlikely – Nomura

As peso hits new 13-year low, bank says not all emerging markets at risk

A foreign exchange crisis is unlikely for the Philippines in the near term, Japan’s Nomura said, with the country getting the best score in an “early warning system” focused on emerging market (EM) economies.

Nomura’s latest Global Market Research report was released as the peso fell to a new 13-year low of P53.88 against the dollar on Monday, down 15 centavos from Friday.

The decline was attributed to strong US jobs data that underscored the likelihood of a fresh Federal Reserve rate hike — increasing the likelihood of fund outflows from EM economies that have come under the spotlight in recent weeks.

The Japanese bank said its Damocles index, which “summarizes macroeconomic and financial variables into a single measure to assess an economy’s vulnerability to a currency crisis,” was currently pointing to seven countries at risk of an exchange rate crash.

Damocles scores economies from zero to 200, with readings over 100 a “warning signal” of vulnerability and those above 150 pointing to a crisis erupting “at any time”.

Nomura tagged Sri Lanka as the most at risk with a score of 175, followed by South Africa (143), Argentina (140), Pakistan (136), Egypt (111), Turkey (104) and Ukraine (100).

Brazil, Bulgaria, Indonesia, Kazakhstan, Peru, the Philippines, Russia and Thailand, on the other hand, had Damocles scores of zero, which Nomura described as an “important result”.

“As investors focus more on risk it is important not to lump all EMs together as one homogeneous group,” it added.

For the Philippines, Nomura said that the country’s current account — at a deficit equivalent to 0.8 percent of gross domestic product (GDP) — was “small and is largely driven by a surge in infrastructure-related spending that will help unlock the economy’s full growth potential.”

The Philippines’ Damocles score has remained at zero since 2006 due to large foreign exchange reserves and low external debt to GDP ratios, it noted.

As of August, the country’s foreign exchange reserves stood $77.828 billion, enough to cover 7.5 months’ worth of imports. The country’s external debt as a percentage of annual aggregate output, meanwhile, improved to 19.1 percent at the end of the first quarter from 20 percent a year earlier.

“Likewise, the fiscal deficit has been kept low due to various rounds of fiscal reforms, including the latest ‘Train’ tax reforms this year (aimed at helping to fund more public infrastructure projects),” Nomura said.

The government incurred a budget deficit of P279.4-billion in the first seven months of the year.

The Tax Reform for Acceleration and Inclusion law, which took effect at the start of the year, raised taxes on fuel products, car sales and sugar-sweetened beverages, among others, in exchange for lower personal income taxes.

Nomura also said that real interest rates in the Philippines were also negative amid aggressive rate hikes by the Bangko Sentral ng Pilipinas in response to accelerating inflation.

“There is plenty of room for further hikes (we expect an additional 50bp [basis points]after the 100bp so far this year) given growth remains strong, led by domestic demand, and the positive output gap,” it added.

Above-target inflation in March has prompted monetary authorities to raise key interest rates by a total of 100 basis points since May. August’s fresh nine-year high of 6.4 percent has raised the prospect of another rate hike when the Monetary Board meets later this month.

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