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LAST MAN STANDING | Philippine economy to prevail when dust of US Fed tapering clears, Nomura says

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MANILA - The Philippines, along with Taiwan, will be the least hurt after the herd of "hot money" leaves emerging Asia once the US Federal Reserve winds down its economic stimulus, according to Japanese financial firm Nomura.

In a report, Nomura said Asian central banks are falling into the same trap as their counterparts in the developed markets---keeping monetary policy "too loose" and so contributing to macroeconomic risks.

It said Asian central banks had been making moves with an eye on the short-term policy horizon, focusing on "loose counter-cyclical policies at the expense of supply enhancing structural reforms."

As such, central banks in the region had been relying more on macro prudential tools to stem credit and property market booms, which should not be the "Holy Grail," the Japanese bank said.

"These tools risk lulling central banks into a false sense of believing that policy has been sufficiently tightened only to find out that, over time, as loopholes are found, these tools have turned out to be a poor substitute for higher interest rates," Nomura said.

It also said that Asian central banks have kept interest rates "too low for too long", which can be justified by making it an insurance against the risks to global growth and warding off too much capital inflows.

However, the low interest rates has led to "growing financial vulnerabilities," which would put China, Hong Kong and India in the high-risk category, Nomura said.

Indonesia is at the lower end of the high-risk category, while in the high-end medium-risk category are Korea, Malaysia, Singapore and Thailand and Japan at the lower end.

Nomura classified the Philippines and Taiwan as the least vulnerable to a macro crisis.

According to Nomura, when the US Fed starts tapering its bond-buying program, then investors would now be choosier in placing their bets in a country. They would prefer economies with sustainable growth over fast growth and those countries that pursue structural reforms and those that can unwind the loose macroeconomic policies that had driven property and credit market booms.

Given this, countries with weak economic fundamentals or "too slow" in normalizing macro policies and reforms would have a hard time attracting investments, the Japanese bank said.

The Philippines is shielded by its "durable" external surpluses, which had been boosted by OFW remittances, business process outsourcing (BPO) and tourism, Nomura said, adding that these had been offsetting the increasing goods trade deficit as a result of the strong domestic demand-driven economic growth.

Nomura said it expects the Philippines' current account surplus to remain solid over the next few years.

Also going for the country is the "strong" investment cycle, thanks to the private sector spending. On top of this, the Philippines also enjoys higher domestic savings and lower fiscal deficits largely due to the reforms in governance.

The investment grade ratings the country received from two of the three major ratings firm have boosted portfolio investment inflows, even as these have become volatile, Nomura said.

It said foreign direct investments have been steadily rising, driven by the improvement in business climate, adding that the liberalization of foreign ownership would improve the environment further.

 

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