An emerging ASEAN leader in more ways than one

The Philippines’ ascent within the ASEAN context is taking place, whether by design or not. Encouragingly, policy makers seem to be playing the part.

IT IS AGAIN that time of year when investors attempt to figure out what to expect over the next 12 months and position accordingly. In the Philippines, this may not be a straightforward exercise but as in my previous piece ( see “Beyond Words,” 24 October

2016), we made the case that the country’s 2017 economic outlook will likely remain solid despite domestic political concerns and an uncertain global backdrop following the “Brexit” shock in Europe and the unexpected Trump victory in the US.

(To read Mr. Paracuelles’ previous contribution published on Business

World, please visit this link https://

goo.gl/ lqsDSo or scan the QR code with a smartphone.)

Beyond that, the year ahead could also present a rare opportunity for the country to shine regionally and be a league leader in various fronts.

First, the economy starts 2017 from a position of strength and therefore should be able to better withstand the impact of rising external risks than most other Asian countries. Domestic demand should underpin yet another year of above 6% GDP growth, led by much needed investment spending. Infrastructure will likely again be a major theme of the year (and beyond) given the government’s strong focus, with an emerging emphasis on decentralizing disbursements that is also being emulated in other countries such as Indonesia. This decentralization is necessary for these vast archipelagoes, and in the case of the Philippines, aligns well with President Duterte’s incentives to make more progress as the first elected president from Mindanao — home to some of the provinces with the widest infrastructure gaps, increasing the likelihood of successful implementation.

Second, economic managers in ASEAN will have to navigate capital outflow risks in the face of rising interest rates in the US and the prospect of a strengthening dollar. Standard measures suggest the Philippines has sufficient buffers to counter these risks: FX reserves now stand at $81.1 billion (well above the $33.7 billion before the 2008 crisis) and are enough to cover 9.5 months of imports, the highest in the region (versus a safe threshold of 3-4 months). These reserves will likely be utilized during bouts of peso volatility to thwart excessive moves. The availability of such wherewithal supports market confidence and as a result, limits the risk of BSP having to resort to administrative measures in currency markets that can prove counterproductive.

Moreover, raising interest rates is a wide open policy option for BSP that also helps to support the currency, a luxury only a few countries have. In fact, BSP is the only central bank in Asia for which we forecast rate hikes this year, and it has ample space to do so given the strength of the economy.

With its inflation-fighting credentials, BSP is likely to hike its policy rates in response to inflation pressures, which we expect to rise significantly throughout the course of the year. The major monetary reforms BSP introduced last year should improve the effectiveness of such policy responses, and are therefore proving timely.

Third, and perhaps most interestingly, regional geopolitical issues were thrust into the limelight last year, and will likely remain so in 2017 with the Philippines at the forefront.

However, Duterte’s so-called pivot to China is suddenly looking prescient following Trump’s surprise victory, which is raising the risk of more inward-looking policies in the US. Not only did his visit to Beijing in October yield sizeable investment pledges and business deals, but it is also likely marking an improvement of ties between the two countries which should reduce tensions in the West Philippine Sea and could therefore prove beneficial to the rest of the region.

Indeed, Duterte’s visit was followed shortly after by Malaysia’s Prime Minister Najib Razak’s visit, and we expect these relationship- building ex-

ercises to broaden to other ASEAN neighbors. The Philippines is essentially already helping to facilitate the seemingly elusive goal of a more unified and integrated ASEAN even before it takes the chairmanship of the regional grouping this year which happens to be its 50th anniversary. Literally speaking, this is a golden opportunity for the Philippines to have a more central role in regional affairs.

The country’s ascent within the ASEAN context is happening, whether by design or not. Encouragingly, policy makers seem to be playing the part.