NextGen Day

The Philippines has strong macroeconomic fundamentals and sufficient policy buffers to mitigate possible capital flow volatility as major countries begin to normalize their interest rates.

Governor Benjamin Diokno of the Bangko Sentral ng Pilipinas (BSP) said in a virtual briefing on Thursday, September 30, 2021, that an earlier-than-expected normalization of major central banks will likely result in a sharp tightening of global financial conditions, which will hurt emerging markets (EMs) like the Philippines.

“Because of its robust, solid macroeconomic fundamentals, the Philippines is in a great position to withstand these foreign challenges,” he added.

Major economies such as the United States and China are recovering from pandemic-related economic problems, thanks in part to quicker deployment of the coronavirus illness vaccine program in 2019. (Covid-19).

This, in turn, prepares the door for future monetary policy tightening, which, if not communicated correctly, may result in market instability, according to Diokno.

For one thing, he added, the Federal Reserve has been indicating its tightening strategy to lead global markets.

Diokno said Fed members are split on whether it is prudent to begin raising key policy rates by next year, citing the latest Fed dot plot, which maps out US monetary authorities’ views on where interest rates are going. The median forecast is a stable policy rate until 2023.

According to Diokno, the earlier-than-expected rate increase would have negative consequences for emerging markets, similar to what occurred during the 2013 “taper tantrum.”

“Amid a repricing of financial asset risks and capital retrenchments from developing economies, this may contribute to depreciation pressures on emerging market currency exchange rates.” Depreciation pressures may impair corporate sector recovery depending on the percentage of nonfinancial corporates’ external loan exposure, he added.

However, the governor of the central bank said that most Philippine corporations can still service interest payments on short-term loans and that most of their bond issuances are in Philippine pesos.

“This suggests that businesses may be shielded to some degree from depreciation pressures associated with a possible increase in interest rates,” he added.

Diokno said that the country’s macroeconomic fundamentals are now in a better position to cope with external shocks since the country’s macroeconomic foundations are intact.

He also said that the BSP is data-driven and is carefully monitoring the effect of both onshore and offshore developments on its policy stance in order to avoid premature policy stimulus withdrawal and protect against developing dangers.

“When internal circumstances necessitate a reduction in policy support as the economy recovers, the BSP will guarantee a seamless transition in the winding down of its time and state-bound measures.” At the same time, the BSP will continue to work closely with fiscal authorities to ensure that adequate policy assistance is available to keep the economy growing,” he said.

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