Peso immune to coronavirus-induced currency crash —Nomura

MANILA, Philippines — The Philippines is unlikely to slip into an exchange rate crisis anytime soon even as recession fears triggered by the global coronavirus disease 2019 (COVID-19) pandemic continue to batter financial markets across the globe, Japan-based investment bank Nomura said Friday.

But Nomura warned that the Philippines could be among the next coronavirus hotspots among emerging market (EM) economies, a development that could put the peso at risk.

In its updated Damocles index — an “early warning indicator” that correctly signaled 67% of the past 54 currency crises — the global bank counted the Philippines as among the countries whose currencies appear to be immune to the coronavirus fallout.

A Damocles score above 100 suggests a country is vulnerable to a currency crisis in the next 12 months. Only the Philippines, India, Bulgaria, Peru, Russia and Thailand got a Damocles score of zero, signaling “very low risk” of a currency crash.

The Damocles system uses macroeconomic and financial variables to check whether an economy is “vulnerable to a currency crisis.” These indicators include a country’s import cover, short-term external debt versus exports, dollar reserves versus short-term external debt, broad money against reserves and real short-term interest rate.

Nomura explained that receiving a zero Damocles score separates these countries from other emerging market (EM) economies, which are more vulnerable to investor dumping during the coronavirus epidemic. As expected, currencies in developed counterparts appear to be on a better footing.

Out of 30 countries tracked by Nomura, Egypt received the highest Damocles score of 176, up 91 points from the July 2019 report. Other countries that are vulnerable to an exchange rate crisis are Ukraine (138), Sri Lanka (110), Pakistan (104) and Turkey (104).

“Many EM currencies have depreciated sharply this year. Under normal circumstances, this would result in an undervaluation of currencies, but these are not normal times,” the investment bank said.

In its report, Nomura noted that EM central banks have been cutting interest rates to save their economies from deep recession as contagion fears prompt leaders around the world to impose draconian lockdowns, which could freeze economic activity.

Back home, the Bangko Sentral ng Pilipinas cut policy rates by 50 basis points on an unscheduled meeting on Thursday, pushing down key rates to new record-lows. After the decision was announced on Thursday, the peso weakened to close at P50.80 against the greenback. The local unit weakened further to P50.9 to close the week on Friday.

But Nomura warned that if these EM countries become the next epicenters of the coronavirus, their monetary authorities may need to reverse course and hike rates to defend their currencies. A weaker currency, for one, can accelerate inflation as it increases import costs, which in turn trickle down to local prices. 

Nomura said the Philippines is among the countries potentially becoming next COVID-19 hotspots, citing the Manila's rising number of infections and weak testing capacity.

“With weaker healthcare systems, EM countries need to be early and aggressive with lockdowns, but in practice that is a daunting challenge in densely populated cities and poverty-stricken slums where social distancing is hardly an option,” Nomura said.

“Without a basic social safety net, choices are extreme: go to work and risk disease, or stay home and be unable to provide for your family,” it added.