Philippines ‘most vulnerable’ to rising US yields – S&P

S&P Global Ratings on Wednesday tagged the Philippines as one of two countries in Asia that are most vulnerable to rising US yields.

In a statement explaining its assertion, the New York-based credit ratings agency said the reflation trade that was lifting US yields would not hit Asian emerging markets’ financial conditions and growth outlook as much as during the “taper tantrum” of 2013.

“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,” Shaun Roache, Asia-Pacific chief economist at S&P, was quoted as saying in the statement.

In 2013, US yields rose after the Federal Reserve (Fed) signaled it would begin unwinding its quantitative easing program. The resulting panic over rising credit costs led to sharp outflows from emerging markets, including those in Asia’s, and forced central banks to hike interest rates.

The debt watcher believed yields were rising in response to hopes that better economic growth would raise inflation in the US.

S&P said Asia was usually a prime beneficiary of improving global growth. It added that economies in the region were better cushioned against external shocks than during the taper tantrum.

Still, it warned that risks remain. If markets decided that the Fed underestimated the inflation risk, and would need to hike policy rates to combat the threat, then Asia’s recovery could be endangered, it added.

“The US treasury market remains important for financial conditions in Asia. Markets can react in a nonlinear way if yields rise very quickly, especially if real yields (rather than inflation expectations) jump and the US dollar appreciates at the same time,” Roache said.

With this, S&P said, “India and the Philippines are the most vulnerable at the current juncture” as both economies have seen inflation pick up in recent months.

In the Philippines, consumer price growth rose to 4.7 percent in February, its fastest in over two years, on higher pork prices in areas outside Metro Manila.

The credit watchdog also said real policy rates in both countries were below long-run average levels, eroding their return buffers.

In the Philippines, the Bangko Sentral ng Pilipinas kept its key interest rates at their record low of 2.00 percent, 1.50 percent and 2.50 percent for overnight borrowing, lending and deposit rates, respectively.

Thus, S&P said, capital may be quicker to leave, and the Philippine and Indian central banks may have to raise policy rates.

“One mitigating factor for both countries is that current accounts are stronger relative to normal levels,” it added.

Latest data showed that the Philippines’ current account posted a surplus of $8.7 billion in the first nine months of 2020, reversing the $3-billion deficit in the same period a year ago. It is equivalent to 3.4 percent of the country’s gross domestic product.

The current account consists of transactions in goods, services, primary income and secondary income. It measures the net transfer of real resources between the domestic economy and the rest of the world.

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