No currency sword of Damocles over the Philippines for now

THE PHILIPPINES is not expected to slip into a currency crisis anytime soon, Nomura economists said, citing little risk of such an event despite the recent weakness of the peso.

In a report released on Monday, the global bank counted the Philippines among the “low-risk” countries in terms of risk of an exchange rate crisis according to its Damocles index, designed as an “early warning system” for such an event.

The bank’s Damocles system uses macroeconomic and financial variables to check whether an economy is “vulnerable to a currency crisis.” These indicators include a country’s import cover, short-term external debt versus exports, dollar reserves versus short-term external debt, broad money against reserves and real short-term interest rate.

Other metrics factored in are gross investment inflows; fiscal and current account; and current account and real effective exchange rate deviation.

A score above 100 means a country is vulnerable to a currency crisis in the next 12 months, while a reading above 150 shows that a crisis “could erupt at any time.”

Among emerging markets, Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine are seeing signs of trouble. Sri Lanka obtained a score of 150 in the index.

The Turkish lira plunged to record lows in August amid an intensifying trade dispute with the United States, which has prompted global investors to sell off other emerging market currencies like the Philippine peso.

Back home, Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. has said the Philippines has been relatively insulated to possible contagion from Turkey’s economic crisis.

“On the other hand, eight countries —Brazil, Bulgaria, Indonesia, Kazakhstan, Peru, Philippines, Russia and Thailand — have Damocles scores of zero. This is an important result,” Nomura analysts said.

“As investors focus more on risk it is important not to lump all emerging markets together as one homogeneous group; Damocles highlights a long list of countries with very low risk of currency crises.”

The last time the Philippines reeled from substantial currency troubles was in 1997 amid the Asian Financial Crisis.

Now, Nomura said the country remains on solid footing despite a growing current account deficit, saying that the trade gap is relatively “small” and is simply due to greater importation that

supports the local infrastructure drive.

Gross international reserves remain “large” as the country’s import cover is beyond seven months, well above the bank’s warning threshold of less than five months.

Short-term external debt also stood at 19.7% of gross domestic product as of July — well below the prescribed 35% cap, according to Nomura’s estimates.

The global bank noted that the BSP has “plenty of room” to raise rates again, which will pull real interest rates back to positive territory. Nomura sees the central bank raising rates by another 50 basis points (bps) in 2018’s remaining months, following a 100-bp cumulative increase so far this year to arrest surging inflation. —