THE PHILIPPINES is poised to maintain above-six percent growth over the next four years, S&P Global Ratings said in a report released yesterday, noting that external developments pose the biggest risk to the outlook as domestic consumption and investment remain robust.

Standard Chartered Bank shared a similar gross domestic product (GDP) expansion projection for this year in a separate report, even as it noted that implementation of the government’s infrastructure development plan “has been subdued, so far.”

STILL BELOW GOVERNMENT GOAL
S&P kept its 6.4% growth forecast for the country, after the Philippine Statistics Authority reported on Thursday last week that the Philippine economy expanded by 6.5% between April and June — slightly faster than the first quarter’s 6.4% but slower than the year-ago 7.1% that benefited from an additional lift from expenditures related to the May 2016 general elections.

The second-quarter GDP pace took average first-half growth to 6.45%, just slightly below the government’s 6.5-7.5% target for 2017.

The debt watcher said last quarter’s GDP reading was in line with its latest estimates, which were last adjusted in July.

“We expect strong domestic demand to drive solid GDP expansion over the next few years, at about 6.5% annually,” S&P said in its monthly economic research on Asia-Pacific economies.

Robust consumption and investment activities will remain the main drivers of economic expansion, riding on “solid demographic trends” as more Filipinos enter the work force, S&P said in its report.

Broken down, the credit rater forecasts annual growth at 6.4% in 2018, 6.6% in 2019 and 6.7% in 2020, which factors in expectations of bigger government spending in light of the aggressive infrastructure push coupled with bigger revenues from tax reform.

The government, however, hopes to spur GDP growth to a faster 7-8% annual pace from next year to 2022, when President Rodrigo R. Duterte ends his six-year term, in order to make a bigger dent on poverty.

That compares to the 6.2% average in 2010-2015 under former president Benigno S.C. Aquino III. Last year saw GDP expansion pick up to 6.9%, just below the top end of an official 6-7% target.

It is that kind of GDP growth that, the current administration hopes, will cut by 2022 unemployment rate to 3-5% from 2016’s 5.5% and poverty incidence to 13-15% from 2015’s 21.6%, while raising per capita income to $5,000 by then from $3,550 in 2015.

S&P pointed out that domestic political issues — including the battle to take Marawi City back from militants aligned with the Islamic State that tomorrow enters its fourth month — are unlikely to derail Philippine growth.

Instead, external risks remain the biggest challenge for the economy.

“External factors continue to be the main source of risks — be it rising protectionism overseas, geopolitical tensions, or uncertainty in financial markets that could lead to capital outflows,” the report read.

“The tail risk of a spillover of tension and fighting in the south (between government forces and extremists) appears to have receded significantly.”

Foreign portfolio investments, an indicator of investor confidence, posted a $202.24-million net outflow as of July, reversing from $1.744 billion that entered in 2016’s first seven months.

S&P said inflation does not pose a concern at the moment as it remains benign, but noted that the central bank could raise borrowing rates this semester amid fast economic growth.

Inflation averaged 3.1% in the seven months ended July, just a notch below the BSP’s 3.2% estimate for the entire year and staying within the 2-4% annual target band for 2017-2020.

In comparison, S&P expects the country’s inflation rate to pick up to 3.4% this year and to 3.5% in 2018, before easing to 3.0% in 2019 and further to 2.2% in 2020.

The country’s current account gap — earlier driven by higher commodity prices and now fueled largely by the importation of capital equipment needed for business expansion and the government’s infrastructure drive — is also expected to ease due to the recent decline in world oil prices.

S&P maintained its “BBB” rating with a “stable” outlook on the Philippines in April, with the view that domestic conditions remain conducive for sustained economic growth. A stable outlook means that the country’s ratings are unlikely to change over the next year or so.

CAVEAT
In a separate Aug. 21 report, titled: “Growth rebounds on government spending,” Standard Chartered said the second quarter’s 6.5% GDP pace “was better than expected” by some in the market though it was “in line with our forecast.”

“The Philippines’ Q2 growth surprised on the upside, at 6.5% year-on-year, in line with our forecast,” the bank said, adding that it was maintaining a 6.5% full-year 2017 forecast for the country that will make it “the fastest growing” economy among the six major Southeast Asian states.

It noted, however, that “… while the government remains committed to spending more on infrastructure, actual expenditure remains subdued for now.”

The government targets its infrastructure expenditures to rise to 5.32% of GDP (P847.22 billion) this year and further to 6.68% (P1.17 trillion) in 2018 from a mere 2.7% average in 2010-2015. By 2022, the target is for infrastructure expenditures to hit P1.899 trillion, equivalent to 7.45% of GDP. This plan lies at the core of the government’s “Build, Build, Build” infrastructure development plan that targets P8.44 trillion in such spending in 2017-2022.

Standard Chartered said inflation “is likely to remain subdued in the near term” — giving projections of 3.1% for 2017 and 3.2% (from 3.0% initially) for 2018 — hence, “… [w]e expect the BSP to keep the policy rate on hold throughout 2017 and 2018.” — Melissa Luz T. Lopez and Elijah Joseph C. Tubayan

LONDON — Emerging economies’ debt in euros has shot to record highs thanks to European Central Bank (ECB) largesse, and yet an approaching end to this generosity won’t necessarily inflict the kind of pain that markets once suffered at the hands of the US Fed.

The ECB’s intention to start winding up its €60-billion-a-month stimulus program for the euro zone economy has revived bad memories of when the Federal Reserve tried to signal something similar in 2013.

That led to the “taper tantrum” when investors took fright at the prospect that the ultra-cheap dollar funding they had grown used to would taper away.

While the ECB will proceed cautiously with its own tapering, the risk is that it could derail an emerging market (EM) rally.

UBS strategist Manik Narain, however, argues that withdrawing quantitative easing (QE) in the euro zone won’t hurt so much as the dollar process.

“ECB tapering will have an impact but it’s definitely the lesser of the two evils,” he said.

While governments, companies and consumers in emerging economies have binged on cheap euro borrowing for the past two-and-a-half years, the total remains modest compared with their dollar debts, Mr. Narain pointed out.

No central bank is finding it easy to withdraw policies that helped to keep Western economies afloat after the global financial crisis. Investors are awaiting word from ECB President Mario Draghi, who will speak at a central bankers’ meeting in the United States this week, on how he proposes to engineer a gradual end to the era of mass bond buying and negative interest rates.

The important thing is to avoid a repeat of the taper tantrum of four years ago. This wiped half a trillion dollars off MSCI’s emerging equity index in three months, raised countries’ borrowing costs by an average one percentage point and pushed some emerging currencies down by as much as 20% against the dollar.

Now it is the ECB’s turn.

Mr. Draghi will deliver no new policy messages during this week’s conference at Jackson Hole, sources say.

However, expectations are high that he will tackle the issue at one of the ECB’s policy meetings next month or in October.

Under Mr. Draghi, the ECB has pumped more than €2 trillion ($2.35 trillion) into the global financial system. His first hint in June that tapering might be coming pushed the MSCI’s emerging equity index down two percent over the following week.

On currency markets, Turkey’s lira and South Africa’s rand fell sharply, not only against a broadly stronger euro but also the dollar. Investors were unsettled by the prospect of higher euro zone bond yields dragging up US borrowing costs in their wake.

Emerging markets have achieved stellar gains this year but investors using the euro have largely missed out due to the currency conversion.

The dollar has fallen five percent versus a basket of emerging currencies tracked by UBS, but the euro is up six percent.

Only four emerging currencies — those of Poland, the Czech Republic, Hungary and Mexico — have strengthened against the euro this year.

Developing economies are more exposed to the euro than any other time in history.

Their euro-denominated debt — including bonds and bank loans — has ballooned by almost €100 billion over the last seven years to around €250 billion, according to data from the Bank for International Settlements.

In Mexico alone, debt in euros has quadrupled since 2010 to over €42 billion.

But even then overall emerging borrowers’ euro debt is dwarfed by the $1.7 trillion they owe in dollars. So they are much more susceptible to movements in US government bond yields than those on the euro zone benchmark, German Bunds.

“The bulk of EM external debt is in dollars rather than euro and the EM corporate sector gravitates towards dollar funding… so a 50 basis-point move in Treasuries matters a lot more than 50 bps move in Bunds, other things being equal.”

European exposure to emerging stocks and bonds also lags the United States.

UBS research suggests more than 60% of EM carry trades — borrowings in cheap developed economy currencies invested in higher-yielding emerging currencies — are denominated in dollars, Mr. Narain said.

As of June 2016, euro zone investors held about €407 billion worth of emerging currency-denominated debt, according to calculations by Bank of America Merrill Lynch (BAML).

But this is little changed from December 2013.

David Hauner, head of emerging markets cross-asset strategy at BAML, says European investors do not appear to have moved heavily into emerging debt during the ECB’s quantitative easing (QE) years.

In fact, most moves happened during the Fed’s own bond-buying from 2009 onwards and when the ECB started its earlier program of showering banks with unlimited, ultra-cheap funding.

A quarter of this money was invested in Polish, Hungarian and Czech debt, the data shows.

Turkey accounts for another €42 billion, while Brazil and Mexico had €39 billion and €74 billion respectively.

Analysis from the Institute of International Finance supports that view. It estimates $200-300 billion flowed to emerging stocks and bonds annually during the peak years of the Fed’s bond buying in 2012-2013. But by last year, when the ECB’s QE peaked, flows declined to $100 billion.

The view that emerging market investing remains a dollar story is supported by a Deutsche Bank study of an equally weighted euro-dollar basket versus 12 emerging currencies. This showed that emerging currencies tended to fall an average 0.6% in months when the dollar strengthened, whereas they rose by 0.4% against the basket during times of euro strength. “These results suggest that if external conditions remain relatively benign, the current emerging currency appreciation cycle has more room to run,” Deutsche’s Gautam Kalani added.

At BAML, Mr. Hauner says euro-based investors earn a better yield premium by investing in emerging markets than those using the dollar. “Unless dollar strength is extreme, euro-based investors do better in EM than dollar-based investors, as euro/dollar removes much of the volatility in emerging currencies,” he said. “In a nutshell we are not very concerned about this.” — Reuters

THE BANGKO SENTRAL ng Pilipinas (BSP) has tightened the requirement for seats and term limits of independent board directors, as part of efforts to boost corporate governance and risk management in banks and other financial firms.

In a statement, the BSP said its Monetary Board (MB) has approved new corporate governance standards for BSP-supervised entities “aimed at ensuring that the board of directors is composed of a collective mix of individuals who possess the expertise and competence to effectively manage the financial institution.”

The BSP also said in its statement that the changes also seek to promote a “critical exchange of views and exercise of objective judgment” in the board.

A board must have a majority consisting of non-executive directors — including independent directors — or those who do not hold key positions involved in the firm’s day-to-day operations.

Moreover, independent directors must account for a third of the board — or two seats, whichever is more — compared to 20% previously.

But the MB retained the existing requirement for simple rural banks to have only one independent director.

An independent director may serve for a maximum cumulative term of nine years.

A non-executive director may concurrently serve as director in up to five publicly listed companies.

The new rules also prohibit one person from concurrently sitting as chairman and chief executive officer in a firm in order “to promote independence of the board from management and to support an environment where the board can sufficiently challenge the actions of those involved in operations.”

The central bank added that “[i]n exceptional cases” when the MB approves that one person may hold both positions, that individual should be “a lead independent director.”

The BSP likewise spelled out the duties and responsibilities of the board, namely: shaping of corporate culture and values; setting objectives, adopting strategies and overseeing management implementation; appointing key members of senior management; overseeing implementation of the corporate governance framework; and adopting a robust risk governance framework.

“The amendments to the corporate governance guidelines are aimed at promoting prudence and greater accountability in line with the implementation of continuing reforms in the financial sector,” the BSP said, pointing out that such reforms further aligned its rules with international corporate governance standards. — M. L. T. Lopez