Healthy foreign reserves give BSP elbow room to cushion market volatility

An exodus of foreign funds from Philippine assets is currently devastating Philippine markets, spurred by the latest policy stance of the US Federal Reserve to taper off its bond-buying stimulus as the world's largest economy improves and recovers from recession.

 

From being the darling of foreign funds in search of better yields since President Benigno Aquino III took over the reins of government in 2010, and after the benchmark PSEi achieved dizzying heights fueled largely by foreign portfolio investments, the Philippine Stock Exchange (PSE) has, in a matter of weeks, metamorphosed into something akin to one of the worst performing markets in the region.

 

According to PSE Market Information, the PSEi carved 31 all-time highs in January to May after achieving 38 of the same last year.

 

All that has changed, particularly after the May 22 statement of Fed officials hinting at the likelihood of tapering off its $85-billion monthly stimulus.

 

“The Philippines (-12.8 percent), Thailand (-12.5 percent) and Indonesia (-10 percent) also stand out in terms of having the three worst performing equity markets over the past month,” read a Bank of America Merrill-Lynch (BofA-ML) report on June 21.

 

On top of that, the peso sank back to the 44:$1 level, its weakest since February 2011. 

 

On Wednesday, Fed chairman Ben Bernanke announced the US central bank may trim its stimulus later this year. His statement unleashed a deadly wave of speculation that eroded the appeal of emerging market assets and caused a blood bath in equities and foreign exchange markets around the world as funds scrambled to position in US assets as early as possible. 

 

Strong fundamentals, record FX reserves 

 

Banks, however, are pinning their hopes on the country's reserves to  help monetary authorities cushion any risks stemming from sentiment-driven market volatility.

 

Strong fundamentals are expected to attract investors back to the country once the Fed-driven jitters have waned. 

 

BofA-ML said Asian economies have “built up a larger war chest of FX (foreign exchange) reserves relative to the Asian financial crisis of 1997,” when capital flight caused a credit crunch that led to a regional financial crisis. 

 

Preliminary Bangko Sentral ng Pilipinas data showed gross international reserves at $82.9 billion as of end-May, with monetary authorities expecting a year-end record level of $87 billion. 

 

Bank of the Philippine Islands (BPI) economist Emilio Neri Jr. said the reserves give monetary authorities leeway to employ tools that cushion risks from capital flight.   

 

“Having sizeable reserves is definitely crucial during sentiment-driven market conditions similar to this current 'Fed-taper' episode,” he said in an e-mail late Friday.  

 

Neri said the Philippine external position “is so solid” it gives monetary authorities “enough flexibility to ease monetary policy further” like trimming another 50 basis points to the central bank's special deposit accounts (SDA) to manage liquidity,

 

Monetary easing could be done should unfavorable “economic conditions persist,” he added. 

 

In a separate June 21 report, British investment bank Barclays is confident of another 50-basis point cut in the SDA window within six months.

 

“We believe the SDA rate cuts will encourage further credit expansion,” said Barclays.   

 

The SDA yield was already trimmed thrice to 2 percent in January to April period. 

 

A higher yield against other investment instruments mops up liquidity in the financial system, while a lower rate flushes money out into the economy.  

 

PHL still a compelling story

 

“While we do not expect this volatility to stabilize soon, we believe that liquidity will return to markets which are able to differentiate itself from the rest,” according to BPI Asset Management, BPI's investment vehicle.

 

“With its healthy fundamentals, the Philippines should remain a compelling investment story,” BPI Asset Management noted in another June 21 report. 

 

Barclays said the Philippines “remains our top pick in Asia... given solid fundamentals... Growth outperformance continues. Inflation remains well contained given soft commodity prices and well anchored inflation expectations,” the British bank said. 

 

The Philippine economy grew by 7.8 percent in the first quarter, the fastest in Asia. Stellar growth was achieved with benign inflation that settled at 3 percent in the five months to May, latest data showed. — VS, GMA News