Philippines, India seen most vulnerable to a ‘taper tantrum’ repeat — S&P


EMERGING ASIA ECONOMIES are “better cushioned” against a possible “taper tantrum” repeat, although India and the Philippines are identified as “most vulnerable,” according to S&P Global Ratings.

“The recovery across Asia’s emerging economies should withstand rising US yields so long as this reflects an improving growth outlook and reflation rather than a monetary shock,” S&P Asia-Pacific Chief Economist Shaun Roache said.

A “taper tantrum” occurred in 2013 when the US Federal Reserve signaled it will start to reverse its quantitative easing. This resulted in panic over rising credit costs which led to sharp outflows from emerging markets and left central banks with the decision to hike interest rates.

US Treasury yields have been rising in the recent weeks. The local market has followed as seen in higher yields in the Treasury bills, as well as the central bank’s term deposits and securities.

“In our view, yields are rising in response to hopes that better economic growth will lift inflation. Asia is usually a prime beneficiary of improving global growth. We also believe that Asian economies are better cushioned against external shocks than during the taper tantrum of 2013. Initial conditions are bolstered by current account surpluses, low inflation (for the most part), higher real interest rates, and fatter foreign-exchange reserve buffers,” S&P said.


However, S&P said there remain risks to Asia’s recovery, especially “if markets decided the Fed underestimated inflation risk, and would need to hike policy rates to combat the threat.”

“In our view, India and the Philippines are the most vulnerable at the current juncture. Both economies have seen inflation rise in recent months. Real policy rates are below long-run average levels, eroding the return buffers. Capital may be quicker to leave and the central banks may have to by raising policy rates. One mitigating factor for both countries is that current accounts are stronger relative to normal levels,” S&P said.

Meanwhile, Oxford Economics Head of Asia Economics Louis Kuijs said the recent yield increases in Southeast Asia are “much milder” than during the “taper tantrum” in 2013, “reflecting better fundamentals — notably stronger current account positions, higher foreign exchange reserves and a larger domestic investor base.” 

Mr. Kuijs said that Southeast Asia, India, Hong Kong, and Australia will likely feel more upward pressures if US rates continued to increase substantially. He added that Asia-Pacific exchange rates are also likely to depreciate further.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the central bank will remain accommodative, stressing they are “not inclined to tighten monetary policy at this time” as the inflation uptick is only temporary and due to supply-side pressures.

Inflation in the Philippines reached 4.7% in February, already above the 2-4% target by the central bank mainly due to higher food and oil prices. The key policy rate is at a record low of 2%.

Mr. Diokno has said they will carefully assess the timing of when to unwind  policy measures to ensure financial stability.

The Monetary Board will have its second policy-setting meeting on March 25. It maintained its policy rates last Feb. 11 but raised its inflation forecast this year to 4% from 3.2% previously. — Luz Wendy T. Noble