PHL among most exposed to shocks in advanced economies, AMRO says

THE PHILIPPINES is among the countries that are most exposed to spillover effects from economic shocks and volatility in developed markets, the ASEAN+3 Macroeconomic Research Office (AMRO) said.

Increased interconnectedness among ASEAN+3 financial institutions, markets and economies highlights the potential for contagion as the region remains susceptible to shocks from global factors and developed economies, AMRO said in its ASEAN+3 Financial Stability Report 2024 released on Thursday.

“Global factors have significant spillover effects on ASEAN+3 financial systems. Japan and Korea, and the regional financial centers (Hong Kong and Singapore), Malaysia and the Philippines are most exposed to global factors such as the VIX (CBOE Volatility Index), macroeconomic risk, commodity prices, and the US dollar exchange rate,” it said.

“The financial markets of developed economies (North America, the UK, and Europe) have strong contagion effects on ASEAN+3, as indicated by the percentage of variation in ASEAN+3 stock market returns attributable to shocks in the stock market returns of these developed economies. All ASEAN+3 economies have significant links to financial systems in developed economies, with equity returns in Hong Kong, Japan, Korea, Malaysia, the Philippines, and Singapore being particularly sensitive to shocks from developed markets.”

Developed economies’ impact on ASEAN+3 is stronger compared with the “moderate” spillover effects from emerging market economies outside the region, such as those in Latin America and the Middle East, it said.

Meanwhile, the Philippines has the least exposure to intraregional financial spillovers, AMRO said.

“The Philippines is a very different economy from the other ASEAN (Association of Southeast Asia Nations) countries in the sense that it is a very service-driven economy, but it has been very resilient in the last few years after the big shock in 2020,” AMRO Chief Economist Hoe Ee Khor said in a virtual briefing, referring to the coronavirus pandemic.

Mr. Khor said the Philippines should maximize potential investments in renewables, business process outsourcing, and tourism to boost the economy’s resilience to external shocks.

“But to do that, they need to develop the infrastructure… [It is] one of the weaknesses of the economy. The policy makers are aware of that, and they have a very ambitious infrastructure plan,” he added.

“And with that, I think the Philippine economy will grow quite rapidly.”

AMRO said the landscape in ASEAN+3 markets has evolved since end-2023 as risks associated with high inflation and interest rates have subsided but those related to geopolitical issues have worsened.

The start of the US Federal Reserve’s rate-cut cycle in September has led to easing monetary conditions globally, it said, but the conflict in the Middle East and the upcoming US presidential election continue to present risks for financial markets.

The region’s reliance on the US dollar also exposes it to risks of potential funding shortage and the transmission of shocks during periods of monetary tightening or geopolitical tensions, it added.

ASEAN+3 economies’ growing interconnectivity highlights the need to “take a holistic macroeconomic and financial view of the region to safeguard against systemic risks,” AMRO said.

“In the near term, authorities should stay alert to the risks of inflation resurgence, escalating geopolitical tensions, or a global growth slowdown, all of which could challenge the resilience of the ASEAN+3 financial system. Given the increased interconnectedness of financial systems, continuous monitoring of international spillovers is essential, along with strengthening ASEAN+3-centric surveillance and cooperation. This includes enhancing cross-border surveillance, data sharing, regional stress testing, home-host supervision, and liquidity support to manage and mitigate potential spillover risks effectively,” Mr. Khor said.

“To improve resilience against external shocks within the dollar-reliant environment, ASEAN+3 economies should reinforce their economic and financial fundamentals, strengthen surveillance frameworks for monitoring US dollar liquidity conditions, bolster macroprudential frameworks for banks and NBFIs (nonbank financial intermediaries), and provide financing support to member economies facing US dollar liquidity stresses. Additionally, reducing structural dependence on the US dollar in the medium to long term by encouraging the use of local currencies and establishing cross-currencies payment systems should be a priority,” he added.

The region should also monitor potential risks in the real estate sector, “as weakened demand and tighter financial conditions in several economies have severely impacted the financial health of property developers, leading to declining profitability, liquidity, and debt servicing capacity,” AMRO said.

“Though to a lesser extent than the Plus-3 economies (China, Korea, Hong Kong, Japan), ASEAN economies like Cambodia, Malaysia, the Philippines, Thailand, and Vietnam face similar issues with high unsold inventories and/or delayed projects,” it said.

Still, Mr. Khor said risks to financial stability in the region appear to have eased this year compared with the situation in 2023.

“The current climate of robust growth and disinflation presents regional policy makers an opportunity to reduce debt, rebuild policy space, and strengthen fiscal capacity to better manage potential shocks. Replenishing foreign exchange reserves during times of capital inflows can further enhance market confidence and provide a buffer against extreme market volatility,” he said.

“To tackle the near- to long-term risks and challenges to ASEAN+3’s financial stability, the region must come together as one and strive for resilience and stability,” Mr. Khor added. — Beatriz Marie D. Cruz