(News Feature)Add’l gov’t reforms, sources of investments needed to cushion volatility on PHL vis-à-vis- ECB stimulus program

By Joann Santiago

MANILA, Jan. 27 (PNA) — Is the recently-announced quantitative easing (QE) program of the European Central Bank (ECB) a positive for the Philippines or otherwise?

In an economic bulletin dated January 23, 2014, which the Department of Finance (DOF) released to the media Tuesday, the DOF said ECB’s bond-buying program has both pros and cons for the domestic economy.

On the positive note, the Finance department said the domestic economy may benefit from ECB’s 60-billion euro monthly quantitative easing (QE) program, which will be implemented from March 2015 to September 2016, through higher inflows from the euro zone just like when the US implemented its own stimulus program.

It noted that the portfolio inflows can reach about USD 3 billion annually, which is about two percent of gross domestic product (GDP), similar to the levels of inflows from euro zone from 2007-09.

”The consequence of the euro zone QE still remain to be seen,” it said but explained that “the greater issue the Philippines faces, however, will be the reaction of investors to the developments in the US.”

When the US implemented three QE program from 2008 to 2014, emerging market economies (EMEs) benefited from the capital flight from the US but things changed after then Federal Reserve Chairman Ben Bernanke announced, in the early part of 2014, the possibility of tapering.

Bernanke’s announcement resulted in extreme global financial volatility, including in the Philippines, which saw a big drop in foreign portfolio investments, otherwise known as hot money due to the speed it comes in and out of the country.

But things recovered after the Fed announced that end of the stimulus program would be done on a staggered basis and after investors recognized that Philippines’ fundamentals remained strong unlike in other emerging economies.

On the same note , the DOF said measures should be put in place to ensure the attractiveness of the domestic economy once tapering of the ECB QE program comes to its end.

With the eventual tapering of ECB’s stimulus program in September 2016, the DOF bulletin identified four items that the Philippines can do to address market volatilities.

First on the list is the increase in the country’s gross international reserves (GIR) “during the years that the international economic conditions are favorable.”

The report noted that the country’s foreign reserve levels increased from about 22.5 percent of gross domestic product (GDP) in 2008 to about 33.6 percent of GDP in 2011.

”Thus, the country’s credibility was not affected by withdrawals,” the DOF bulletin said.

Bangko Sentral ng Pilipinas (BSP) data show that the country’s GIR in end-2008 amounted to USD 37.55 billion while it reached USD 75.3 billion in end-2011.

As of end-2014, the country’s GIR level reached USD 79.81 billion.

It has gone down after peaking at USD 83.61 in October 2013 due to the impact of exchange rate valuations on the central bank’s foreign investments as well as its foreign exchange operations among others.

Monetary officials, however, maintained that the country’s foreign reserves remain adequate as the end-2014 level is enough to cover 10.2 months ‘ worth of imports of goods and payments of services and income.

Aside from high foreign reserves level, the DOF bulletin also said the central bank also has to “adjust monetary policy flexibly to narrow the interest rate differentials between the peso and euro/dollar, as needed.”

”This will trim the net outflows to more manageable levels,” it said.

Another factor to consider is to look for more investment options “so that outflows from one country will be offset by inflows from another.”

”This occurred during the period 2007-2009 when negative flows from USA due to the GFC (global financial crisis) were almost totally offset by Europe inflows,” it said.

The bulletin also suggested for the continued strengthening of domestic fundamentals through structural and government reforms.

”These are the most effective antidotes of volatility,” it said. (PNA)