BSP acts to calm financial markets

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) said yesterday strong macroeconomic fundamentals and sufficient buffers would help the Philippines survive the decision of the United Kingdom to leave the 28-nation European Union (EU).

BSP Governor Amando Tetangco Jr. said in a text message to reporters monetary authorities are ready to act swiftly to minimize the impact of Britain’s decision to leave EU on the domestic financial markets.

“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,” Tetangco said.

Tetangco explained the decision of Britain to leave EU would result in market volatility as investors shift to safe haven currencies such as the dollar and Japanese yen.

“As expected, the 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. Even as the direct Philippine exposure to UK is relatively small, we will watch the impact on us via contagion from moves in the dollar,” Tetangco said.

Finance Secretary Cesar Purisima said the improvement in the country’s macroeconomic fundamentals would put the economy in good stead in wake of the global financial turmoil brought about by the British decision to leave UK.

“The world has entered uncharted waters with Brexit. The repercussions will roil the global financial markets and will affect all countries without exception but to varying degrees. The improvement  in our macroeconomic fundamentals over the past six years will put us in good stead but should not lull us into overconfidence. It is true that we are less vulnerable than others but we are not immune and therefore we should continue to build on the gains of the Aquino administration by continuing to strengthen the macroeconomy, continuing to build  on the confidence of the markets and by continuing to address the  remaining constraints to growth,” Finance Secretary Cesar Purisima said.

BSP Deputy Governor Diwa Guinigundo said the central bank is prepared to undertake whatever action is necessary should there be a negative impact of the Brexit.

 “We are not taking a position. Whatever happens in the poll we are prepared to undertake what is necessary,” he said.

For his part, incoming finance secretary Bejamin Diokno said, “whether Britons vote to exit or stay in the European Union may have little or no impact on the Philippine economy.  Unless of course Brexit would lead to the collapse of EU,  which I think is remote.  Most of our problems – poor infrastructure,  high costs of doing business,  sluggish agriculture,  widespread poverty – are domestic in nature.  We need to address them regardless of what is happening externally.”

Guinigundo said the country’s sustained economic growth for the past 69 quarters since 1999 as well as the healthy balance of payments (BOP) position and higher gross international reserves would cushion the impact of Brexit on the domestic foreign exchange market.

“I think we have sufficient buffers to be able to absorb any negative consequences of  Brexit,” Guinigundo said.

The country’s gross domestic product growth accelerated to 6.9 percent, making the Philippines the fastest growing economy in Asia in the first quarter from the revised 6.5 percent in the fourth quarter of last year.

“Should safe haven mentality prevail, I think we have sufficient strong macroeconomic fundamentals to provide them with some second thoughts about leaving the domestic financial markets,” he said.

Amid the sustained economic expansion, he added, the country’s inflation environment remains benign and is expected to remain within the mid point this year and below the mid point of the two to four percent target range.

“Should it be necessary, I think our foreign exchange reserves are sufficient in terms of possible higher demand for foreign exchange. After all we continue to have a BOP surplus and the current account is generally good. So on that basis we should be able to accommodate that kind of an outcome in Great Britain,” Guinigundo said.

With the decision to leave EU, Britain would have to renegotiate trade pacts with other European countries as well as major trading partners led by the US.

“In more ways than one, Brexit is an unfamiliar terrain for UK. 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.

The result of the referendum, he explained, is driving the sharp volatilities in both the equities and foreign exchange markets.

“We are closely monitoring the foreign exchange market and we remain prepared to act in order to ensure orderly transactions and smooth wild volatility. And we are confident that the flexible exchange rate regime would be able to absorb the necessary adjustments should they be necessary,” he added.

Joey Cuyegkeng, senior economist at ING Bank Manila, said a significant slowdown in the euro zone as a result of the Brexit would have significant impact on the Philippines.

Cuyegkeng explained Europe cornered 12.6 percent of the country’s total merchandise exports and accounted for 11.4 percent of total imports last year. About 15.5 percent of the total cash remittances from overseas Filipino workers last year also came from Europe.