The Market Monitor Minding the Nation's Business
By Luis Leoncio
As 2016 closes, Bangko Sentral ng Pilipinas (BSP) Gov. Amando M. Tetangco Jr. has listed the three “tail risks” to the economy, none of which involves concerns over President Duterte’s statements that his critics said were to blame for the recent weakening of the peso and the local bourse.
In a speech before the recent Security Bank Economic Forum, Tetangco said the main risks to the economy are the effects of Brexit, the decision of the United Kingdom to separate from the European Union; the outcome of the US elections in November that resulted in the victory of Donald Trump; and the rebalancing of China’s economy.
Tetangco said the risks are similar to the concept of tail risk in economics or statistics, which he defined as the risk of a “very rare” event occurring.
“It can be argued that 2016 was a year wherein a number of these tail-risk events or tail events materialized,” he said.
“For instance, in June, there was Brexit; five months later, the outcome of the US elections. In both cases, the mainstream media (e.g. CNN, CNBC) underestimated the underlying sentiment, which caused shockwaves across the globe. The same was the case in the financial markets,” Tetangco added.
He noted that traders and analysts also “got these (events) all wrong.”
Tetangco said data suggest that the direct impact of Brexit on the domestic economy would be limited.
Trade with and foreign direct investments (FDI) from the United Kingdom (UK) represent less than 1 percent of total trade and FDI, respectively.
He said, however, that it is the second-round effect that remains a concern.
“In other words, how Brexit would affect growth in the EU. In addition, there are a number of European nations holding their elections next year. We need to be watchful, whether there would be others that would follow what the UK did and break away from the EU,” he added.
The assumption to office of President-elect Trump, is another “tail event” that Tetangco said may affect the economy.
“It is too early to tell how he would govern. But based on what we heard during the campaign, we need to be vigilant over possible changes in tax laws, immigration policies and financial and business regulations.”
Tetangco added that the BSP will keep an eye on the possible impact of shifts in immigration policies on remittances as well as the prospects of sustained investments from US business process outsourcing (BPO) companies.
The third risk is the ongoing rebalancing of the Chinese economy.
“A protracted slowdown of the world’s second-largest economy, as it transitions from being export-led to being services- and domestic consumption-driven, could impact on our external sector, given the increasing bilateral relations between our two economies in recent years,” Tetangco said.
Brexit, the results of the US elections and the shift in focus of the Chinese economy seem to reflect a desire within certain jurisdictions to more and more address domestic concerns with policies that are “inward-looking,” Tetangco said.
He noted that these events are the results of “frustration” at the failure of “openness” in both the goods and labor markets to raise economic well-being.
“Moreover, the continued weakness in global growth has encouraged policy makers to look to domestic aggregate demand as a key driver for economic growth,” he said.
The phenomenon was viewed by some as a “retreat from multilateralism” and Tetangco said that if it continues, near-term global growth is expected to remain at low levels. “Persistence of low global growth could, over time, adversely impact on our external trade and overseas Filipino workers (OFW) deployment. In turn, these may dampen remittances and relatedly, domestic consumption,” he said.
Tetangco said a clear lesson that Filipinos must learn from the 2016 tail events is that the country should prepare for the unexpected.
“From the perspective of a policy maker, like the BSP, preparing for the unexpected translates to enhancing surveillance and building buffers,” he said.
Turning to financial markets, analysts are putting the probability of a Fed rate hike in December (as implied by US Fed funds futures) at over 90 percent, Tetangco said.
“Together with sustained labor market improvement, the latest meeting of the Fed showed that core inflation is likewise inching up, which supports the case for a hike soon. As the Fed meeting in December nears, this probability may get even higher,” Tetangco said.
On the domestic front, the only challenges that Tetangco sees are “the impact of severe weather disturbances and the infrastructure gaps.”
He noted that the Philippines is now the fastest growing among major Asian emerging economies that have already released data for the quarter.
“We are higher than China’s 6.7 percent, Vietnam’s 6.4 percent, Indonesia’s 5.0 percent, and Malaysia’s 4.3 percent. This outturn also brings to 71 the number of consecutive quarters of positive economic growth. It is equally important to note that such strong growth performance continued under low and stable inflation,” he said.
Tetangco said the economy’s growth dynamics continue to be convincing, with domestic economic activity seen to remain firm, supported by solid private household consumption and investment, buoyant business and consumer sentiment, and adequate credit and domestic liquidity.
“While average inflation is likely to settle slightly below the lower bound of the 2 to 4-percent target range in 2016, inflation is projected to rise toward the mid-point of the target range in 2017 and 2018,” Tetangco added.
He, however, said the overall balance of risks surrounding the inflation outlook is tilted to the upside, owing largely to the pending petitions for adjustments in electricity rates along with the proposed fiscal reform program.
“Given the external headwinds, I believe our defense system is sound.”
On the weakening of the peso, which some said is worrisome, Tetangco said the BSP’s policy “has always been to allow market forces to determine the exchange rate.”
“But if we see movements that are excessive, we will not hesitate to participate in the market to keep volatility in check. Our flexible exchange-rate policy provides us with a reliable tool to shield the economy from temporary gyrations, while our adequate reserves and sustained current-account surplus fundamentally anchor our external position,” he said.
“Our banking system also continues to be sound and effective in intermediating funds from savers to the productive sectors of the economy,” Tetangco added.
“The country’s economic record continues to be underpinned by our ability to show that our macroeconomic institutions are working. We have institutions that have well articulated policy frameworks, emphasize anti-corruption and uphold good governance,” Tetangco said. “We should not be sidetracked by the unexpected, rather it should urge us to be more strategic and deliberate about our decisions.”