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Philippines advised vigilance despite strong growth prospects

Posted on May 05, 2017

YOKOHAMA, JAPAN -- The Philippines will be one of the fastest-growing economies in a grouping of Southeast Asia plus China, Hong Kong, Japan and South Korea as a result of policies and reforms put in place in the wake of the 1997 Asian Financial Crisis, according to estimates of an international organization formed to help prevent a repeat of a financial meltdown.

The maiden ASEAN+3 Regional Economic Outlook report, titled: “ASEAN+3 Region: 20 years after the Asian Financial Crisis”, was released by the ASEAN+3 Macroeconomic Research Office (AMRO) in a briefing yesterday at the InterContinental Yokohama Grand hotel to mark two decades after that disaster.

AMRO -- initially formed as a company in April 2011 and transformed into an international organization in February 2016 -- conducts macroeconomic surveillance and supports the implementation of the Chiang Mai Initiative Multilateralization currency swap arrangement which members of the ASEAN+3 adopted as one mechanism to help forestall any brewing financial crunch.

“The ASEAN+3 region remains in a position of strength and has shown resilience so far to external shocks caused by global policy uncertainty, such as the ‘taper tantrum’ in May 2013, the Brexit referendum and the unexpected outcome of the US Presidential election in November 2016,” the report read.

“Barring tail-risk events such as an escalation of US-China trade tension, an outbreak of a geopolitical conflict or severe climate change events, the baseline scenario is for moderate growth to continue in 2017-18.”

The Philippines is expected to be one of the leaders of the pack at 6.8% this year, though down from 2016’s actual upwardly revised 6.9% and near the midpoint of the government’s own 6.5-7.5% target.

At that pace, it matches Cambodia and trails only Laos and Myanmar -- each of which is expected to expand by 7.0% -- and tops the likes of China (6.5%) and Vietnam (6.4%), as well as ASEAN+3’s projected 5.2% average for 2017.

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Next year will likely see the Philippines’ pace accelerate to 7.0% against a 7-8% government target, matching that of Laos, followed closely by Cambodia’s 6.8% and Vietnam’s 6.4%, outpaced only by Myanmar’s 7.2% and topping the region’s 5.1% forecast average.

Inflation is expected to be generally supportive of growth at 3.1% and 3.2% for 2017 and 2018, respectively, from 2016’s actual 1.8%. While inflation has been picking up from below-two percent since September last year, last quarter’s 3.2% average was comfortably below the central bank’s 3.4% forecast for this year.

AMRO’s 2018 projection, on the other hand, pierces the central bank’s 3.0% forecast for that year, although a 2-4% official target band is in place for these two years.

“The Philippines is a star performer in this group... and it has gotten to a point that we think growth can be sustained at a relatively high level...,” AMRO Chief Economist Hoe Ee Khor said in the briefing when asked on risks the country faces.

While he noted that the country’s “external position is coming under pressure,” Mr. Khor said “this is a good current account deficit because it has been sustained by a growth in [imports for] investments.”

Moreover, he added, the country “has built up... a relatively high level of reserves”, which grew to $81.045 billion at end-2016 from end-2015’s $80.667 billion, even as it fell short of an $83.7-billion central bank projection. These reserves slipped to a three-month-low $80.873 billion in March from February’s $81.436 and $82.977 billion in March 2016, and the central bank now expects total reserves to reach $84.7 billion this year.

While noting that the economy’s general strength makes it “a very attractive destination for investments”, Mr. Khor said Philippine authorities “need to be vigilant because inflation is picking up” and due to growing protectionist pressures abroad that could hit the two economic pillars of business process outsourcing and overseas worker remittances.

“So our view is that growth can be sustained going forward, but at the same time authorities need to be more cautious and begin to tighten policy when necessary to provide support.”

The central bank’s Monetary Board, which convenes on May 11, kept policy steady in its March meeting. Key interest rates were last adjusted in September 2014.

He added that any impact from political noise at home on growth projections will be “not much because we know the momentum was already there when the new government took office so... we are confident that growth can be sustained at a relatively high level.”

Regionwide, the report noted that “[w]hile the economies in the ASEAN+3 region have weathered external shocks well in 2016, global policy uncertainty has risen significantly, in particular for the global trade outlook with rising protectionist sentiment.”

“Global financial markets remain volatile, with spillovers on emerging markets in our region.”

In a forum after the briefing, themed: “Twenty Years After the Asian Financial Crisis: Achievements and Ways Forward”, Finance Secretary Carlos G. Dominguez III said in a brief speech that “because each (ASEAN+3) economy has done its work in improving corporate governance and because all economies in the region have worked to improve mechanisms for financial support, the likelihood of a region wide financial meltdown has been reduced.”

ASEAN+3 economies responded to the 1997 crisis by building buffers as well as strengthening macroeconomic management and policies.

“That does not mean, however, that our regulatory authorities should let their guard down,” Mr. Dominguez clarified, adding that “[t]he 1997 financial crisis tells as that lax regulations and poor policies can cause a quickly spreading crisis.”

These briefings and fora took place at the sidelines of the Asian Development Bank’s 50th annual meeting here that formally began yesterday. -- Wilfredo G. Reyes