Friday, December 16, 2011

5 Reasons Why the Philippines Will Fare Relatively Well in Another Financial Crisis

Last week, I attended a seminar entitled "Can Emerging East Asia Weather Another Global Economic Crisis?" "Emerging East Asia" pertains to the ASEAN 10 (Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Burma, Cambodia, Laos, and Vietnam), China, Taiwan, Korea, and Hong Kong. Key participants included Mr. Iwan J. Azis, head of ADB's Office of Regional Economic Integration, and representatives from the International Monetary Fund (IMF), the Hong Kong Monetary Authority, Barclays Capital, and the Korea Institute for International Economic Policy. In this post, I will highlight important insights that I gathered from the event and how these will affect the economic prospects of the Philippines in the coming years.

Mr. Azis opened the seminar with a presentation of key points from the Asia Economic Monitor for December 2011. ADB sees that if the debt problem in Europe is not resolved and contained in the coming weeks and months, it may lead to any of the following three scenarios: first, a recession contained to the Eurozone; second, a recession in Europe and, to a lesser degree, in the US; and finally, a full-blown global financial crisis.

Just as in 2008/2009, any one of these situations could result in heightened risk aversion among investors and a sharp drop in global demand for goods and services that would, in turn, adversely affect countries from emerging East Asia to varying degrees. The extent of the damage to any particular economy and the capacity of that economy to recover from the crisis will greatly depend on the following factors:

  • The "health" of the financial/banking sector and its exposure to toxic assets
  • The economy's exposure to European and US banks
  • The economy's dependence on foreign demand (i.e., exports) vis-a-vis local demand
  • The capacity of the economy to enact timely policy responses
In the worst case, ADB forecasts that regional growth will go down by 1.8 percentage points, assuming no policy response from the concerned economies.

How will the Philippines fare compared to other emerging East Asian economies? 

There are indications that the Philippines will fare relatively well in an impending financial crisis.

1. The Philippine banking sector remains conservative, and this will continue to shield us from the brunt of any financial crisis, just as it did in 2008. Also, efforts by the BSP to impose stricter capital requirements, particularly for thrift and rural banks, in the past couple of years further strengthen the banking sector as a whole.

2. The Philippines has a lower exposure to European and US banks compared to other countries in the region.

3. The Philippines has significantly reduced its reliance on US and European trade in the past couple of years.

4. Philippine households have remained financially conservative, especially compared to other economies in the region. Of course, the figures below most probably does not capture informal debt, and so may be understated.

5. (This is just my opinion) The Aquino administration's efforts to hold the previous administration accountable for past transgressions has and will continue to lead to stronger investor confidence.

Although no one particular country was discussed in the seminar, this final slide from ADB clearly supports the conclusion that the Philippines will fare relatively better than other economies in the region in a global economic crisis scenario.

Which should be very good news for most of us, although I'm not particularly ecstatic about all this since most of my investments are here in Hong Kong. Oh well, I guess I would just have to boost my Philippine holdings as much as I can.

As for the question "Can Emerging East Asia Weather Another Global Economic Crisis?", Mr. Azis' answer was straight to the point: "Yes, but we have to prepare for the worst."

And here's a gratuitous shot of Hong Kong harbour from the event location.

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