Inevitable

The uncertainty hounding emerging markets around the globe for the past several months is coming to an end as the US Federal Reserve Board has decided to reverse its bond-buying stimulus program. The shift, however, will be gradual and—combined with the Fed’s commitment to keep interest rates very low—will provide much relief to economies like those of the Philippines.

The Bangko Sentral ng Pilipinas was in fact unfazed by the surprise announcement last week on the modest tapering of the Fed’s $85-billion bond-buying a month to $75 billion starting in January. BSP Governor Amando M. Tetangco Jr. said there was little need to adjust current local monetary settings.

The Fed went against a general consensus last week when it announced a reduction in its bond-buying program given signs of a more solid recovery of the American economy. “The improvement in economic activity and labor market conditions over [the review] period [is] consistent with the growing underlying strength in the broader economy,” the Fed’s policymaking body, the Federal Open Market Committee, said. It added that it would “likely reduce the pace of asset purchases in further measured steps at future meetings.” In an effort to calm global markets, the Fed stressed that its key interest rate would remain low until the US unemployment rate falls below 6.5 percent. The jobless rate in the United States stands at 7 percent.

Market analysts agree that the reassurance to keep interest rates low can offset the negative impact on global financial markets of the $10-billion reduction in the Fed’s monthly bond purchases. They say that as long as the Fed keeps its promise to maintain the interest rate near zero, a sharp plunge in global stock and currency markets may not happen.

Other analysts believe that the small amount of reduction indicates some tentativeness in the strength of the American economy’s recovery and the employment picture. Since May when Fed Chair Ben Bernanke raised the idea of tapering, global markets have been volatile as investors are uncertain about what will happen. The money generated by the stimulus program has flowed to emerging markets where returns were much higher than the low interest rates in the United States, sending many stock indexes soaring to record highs. Our own Philippine Stock Exchange index reached record highs in midyear. The idea was to keep US loan rates cheap so the world’s biggest economy could recover from the repercussions of the 2008 subprime financial crisis. As key economic indicators—particularly the gross domestic product (GDP) and unemployment—start improving, US policymakers believe that the economy no longer needs the stimulus program. The US economy grew at a faster-than-expected 3.6 percent in the third quarter of 2013. Unemployment also fell to 7 percent, the lowest since 2008, but still higher than the 6.5-percent threshold.

For emerging-market economies, the US stimulus program has been both a bane and a boon. Years of easy money have flooded many emerging markets with cash looking for higher returns. This, in turn, boosted their currencies and their economies in general. However, it also made exports more expensive and therefore less competitive.

A positive aspect of this taper issue is that a stronger US economy can lead to higher demand for products manufactured in Southeast Asian exporting countries like the Philippines. The BSP earlier said that emerging market currencies like the peso, which have appreciated this year due to the abundance of dollars triggered by the US bond-buying program, could weaken as the Fed starts its taper program. A depreciating currency will increase the peso value of remittances sent home by overseas Filipino workers, supporting domestic spending in the country. It will also make Philippine exports cheaper and therefore more competitive.

There is another good side to this inevitable reversal of the United States’ easy-money policy. Analysts believe that with the removal of the easy-money policy that flooded emerging markets with cash that bought any stock or currency in sight, investors will now go back to looking at the fundamentals—the economic prospects of the countries they are planning to invest in, and the profit outlook of the specific companies they want to buy into. The Philippines ranks high in both.