LOCAL financial markets took a beating on Friday following Britain’s vote favoring the exit of the United Kingdom from the European Union (EU); but the Bangko Sentral ng Pilipinas (BSP) was quick to assure markets of the Philippines’s anchored macroeconomic fundamentals and its readiness to “provide liquidity to the market, as needed.”
Markets across the world watched as citizens from the UK cast their vote on the referendum of Britain’s membership in the EU, with a majority of 51.9 percent voting to leave the bloc.
The UK’s historical move as the first country to withdraw its membership from the EU rattled financial markets across the world, not sparing emerging-market economies such as that of the Philippines.
On Friday the Philippine Stock Exchange index fell by 1.29 percent, registering declines across all subsectors at the trading day’s close.
The local currency, meanwhile, neared the 47 territory at its close on Friday, losing 41.5 centavos to hit 46.95 to a dollar from 46.535 in the previous day.
Central Bank Gov. Amando M. Tetangco Jr. was quick to assure markets that the local currency’s decline was along the line of its regional peers. He, however, warned of more volatility in the near term in the light of the after-effects of Brexit.
“As expected, the US dollar and yen benefited as safe-haven currencies. While regional currencies are down, the peso remained in the middle of the pack. We can expect more volatility in domestic markets in the near term,” Tetangco said.
“Even as the direct Philippine exposure to the UK is relatively small, we will watch the impact on us via contagion from moves in the US dollar,” he added.
The governor further said the BSP will look at developments, particularly how the rest of EU will react to Brexit.
“The BSP is ready to provide liquidity to our market as needed. But we don’t see any need to change stance of monetary policy at the moment,” he said.
Diwa C. Guinigundo, central bank deputy governor for the monetary stability sector, said the possibility of unwanted consequences of Britain’s exit of the EU is what markets are fearing.
“In more ways than one, Brexit is an unfamiliar terrain for the UK. The UK and Europe share many years of important trading and investment linkages. Hence, such an annulment could bring about unwanted consequences on both the real sector and the financial markets on both sides of the English Channel,” Guinigundo said.
“This fact is driving the sharp volatilities in both the equities and foreign-exhange [forex] markets. The dynamics of capital flows from emerging markets is also likely to be affected and, hence, we would be feeling the fallout as we did today when the Asian regional currencies dropped precipitously and equities market profusely bled,” he added.
The deputy governor backed Tetangco’s assurance, saying the central bank is “closely monitoring” the situation, particularly in the forex market, and remain “prepared to act” to “ensure orderly transactions and smooth wild volatility.”
“We are confident that the flexible exchange-rate regime would be able to absorb the necessary adjustments should they be necessary. After all, the market should be assured of the strength of the Philippine macroeconomy and the banking system, as well as the comfortable level of both our forex reserves and the forex deposits in the banks,” the deputy governor said.
ING Bank Manila senior economist Joey Cuyegkeng also remains confident of the local market’s ability to normalize following its slump on Friday, as central banks are expected to moderate the impact of Brexit.
What Cuyegkeng is worried about, however, is if the Brexit ultimately leads to a slowdown in Europe’s economy.
Moody’s Investors Service has already released its initial assessment of Brexit, saying it ushers in a “prolonged period of policy uncertainty” and is credit negative for the UK.
“Heightened uncertainty will likely dent investment flows and confidence, weighing on the UK’s growth prospects, a credit negative for the UK sovereign and other UK debt issuers,” Moody’s said.
The credit watcher is also of the view that key credit risks include potential changes to the UK’s commercial relations with the EU, as well as regulatory regimes, access to funding and immigration policy.
“But a significant slowdown in EZ [euro zone] as a result of Brexit would have a more significant impact on the Philippines. Europe accounts for 15.5 percent of the total cash remittances of overseas Filipinos in 2015, with exports to Europe accounting for 12.6 percent, while imports from Europe accounts for 11.4 percent of total imports,” Cuyegkeng said.
Image credits: AP/Virginia Mayo
1 comment
A very good reason for investors to move to the ASEAN region. Hopefully we, the Philippines is ready to accommodate the influx.