ASEAN+3 think tank flags financial stress levels in the Philippines

THE PHILIPPINES is among the main sources of “financial stress” within the Association of Southeast Asian Nations (ASEAN), which became elevated in early 2018, although still below historical levels.

According to a working paper from the ASEAN+3 Macroeconomic Research Office (AMRO), “Assessing Financial Stress in China, Japan, Korea and ASEAN-5 Economies” published on Friday, flagged increased the Philippines’ widening current account deficit and a weakening peso.

The working paper created a “financial stress index (FSI),” that determines a period “when the financial system is under strain and its ability to intermediate is impaired,” such as an interruption to the normal functioning of financial markets based on large swings in asset prices, an abrupt increase in risk and/or uncertainty, liquidity droughts, and concerns about the health of the banking system.

The FSI focuses on selected financial-sector indicators such as stock market volatility, foreign exchange volatility, sovereign debt, corporate debt, and interbank lending, in the ASEAN+3 region, plus ASEAN’s core countries, known as ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand).

AMRO said that the stress indicators started to rise in early 2018 in the ASEAN+3 region, “reflecting a confluence of global factors (such as escalation of global trade tensions and US Fed Policy), as well as country-specific vulnerabilities in some emerging markets outside the region (such as growing macroeconomic imbalances in Argentina and Turkey).”

“In ASEAN-4, the pressure on EMPI (Exchange Market Pressure Index) was particularly visible, as currencies have depreciated alongside drawdowns on foreign reserves. Indonesia and the Philippines are the two major contributors to the higher aggregate stress level in ASEAN-4, partly reflecting the structural vulnerabilities (e.g. widening current account deficits),” AMRO said.

“However, so far, the level of financial stress in the region has not been as high as compared to the level experienced during the August 2015 shock, when China announced changes to its central parity exchange rate mechanism,” it added.

In the first half, the Philippine current account matched the $3.1-billion deficit target set by the government amid a widening trade deficit and the peso’s depreciation into 13-year lows past P54 to the dollar.

However, gross international reserves remain at adequate levels, equivalent to 7.5 months’ worth of imports of goods and payments for services, well above the three-month international standard deemed prudent.

The think tank noted that the highest FSI level on record was during the 2008-2009 global financial crisis, with “significant, but limited” impact from the European debt crisis in 2010 and the US Federal Reserve taper tantrum in 2013.

AMRO said that governments can use the FSI as a surveillance tool for preemptive policy measures when financial stress levels are starting to escalate. —