Peso exchange has further room to fall

The Philippines peso has endured heavy selling and there are concerns there may be more downside as the Southeast Asian nation confronts growing economic imbalances.

The Philippines economy has performed strongly over the past five years, growth has averaged 6.6%, but ANZ economists Sanjay Mathur and Eugenia Victorino are concerned about intensifying imbalances highlighted by rising credit intensity, high exposure to real estate and rising property prices, and a deterioration in the country's external position.

The nation used to enjoy a current account surplus and modest credit growth – but no longer. Credit has grown rapidly and there is now a current account deficit.

That credit growth has seen the credit impulse – measured as the ratio of absolute annual growth in credit to nominal GDP – increase rapidly. Here's why ANZ says that is a concern:

Some commentators do not regard this trend to be a cause for concern, as total outstanding credit as a share of GDP is still low at 46%.

We are, however, of the view that the pace of credit expansion is an equally important determinant of the efficiency of resource allocation.

The example of India is instructive in this regard. Although India's credit-toGDP ratio has consistently remained below 60%, the rapid growth in credit during the pre-GFC period eventually culminated into a significant deterioration in asset quality.

A lot of that credit is finding its way into the property sector, which has been reflected in property prices. ANZ is concerned that a leveraged cycle of property is now in train.

The growth in credit is also driving domestic demand has fueled more imports, which are hurting the Philippines external position.

While there seems to be a need to make adjustments, ANZ reckons that is unlikely as policymakers seem more focused on driving growth. That means that it is likely the currency will be the way by the imbalances will be adjusted. The peso has been the worst performing Asian currency against the US dollar over the past year, falling close to 9% against the greenback. ANZ reckons there may be more downside to come.

Considering the Bangko Sentral ng Pilipinas' (BSP) hesitation to tighten monetary policy, it is likely that these imbalances will persist. As a result, it will be the Philippine peso that would need to bear the burden of adjustment.

The deterioration in the current account since 2015 has already led to a weakening PHP. With the current account now slipping into deficit, pressure on the PHP will remain.

To fund the current account deficit, the Philippines would need to rely more on portfolio inflows. However, unlike India and Indonesia, which run deficits that are easily funded by strong portfolio inflows, the Philippines does not attract large inflows.

The small size of its domestic equity and bond markets, and the low yield it offers as well as being absent from global benchmarks, is a handicap.

The PHP is the region's worst performing currency year-to-date. In fact, PHP depreciation would have been larger in the absence of intervention by the BSP.

The scale of intervention can be gauged from the fact that gross international reserves had declined from a peak of US$86.1bn in September 2016 to US$80.8bn in July, 2017.

This decline is in stark contrast to the rest of the region which has seen reserves position improve. Absent of any other policy responses, further PHP depreciation is likely. (Dow Jones)