THE PHILIPPINES are among the most exposed countries overflow eFffects from the economy shocks and volatility in developed markets, the ASEAN+3 Macroeconomic research Office (AMRO) said.
Greater interconnectedness among ASEAN+3 FFinancial institutions, markets and economies are highlighting the potential for contagion as the region remains vulnerable to shocks from global factors and developed economies, Amro said in the ASEAN+3 Financial Stability Report 2024 published on Thursday.
“Global factors have a significant influenceFno overflow eFimplications for ASEAN+3 financial systems. Japan and Korea, and the regional ones FFinancial centers (Hong Kong and Singapore), Malaysia and the Philippines are the most exposed to global factors such as the VIX (CBOE Volatility Index), macroeconomic risk, commodity prices and the US dollar exchange rate,” the report said.
“The FFinancial markets of developed economies (North America, Britain and Europe) have strong contagion effects on the ASEAN+3, as evidenced by the percentage of variation in ASEAN+3 stock market returns that can be attributed to shocks in the stock market returns of these developed economies. economies . All ASEAN+3 economies have important links with financial systems in developed economies, with stock returns in Hong Kong, Japan, Korea, Malaysia, the Philippines and Singapore particularly sensitive to shocks from developed markets.”
The impact of advanced economies on ASEAN+3 is stronger compared to the “moderate” spilloversFimpacts from emerging market economies outside the region, such as those in Latin America and the Middle East, the report said.
Meanwhile, the Philippines is the least exposed to intra-regional Ffinancial spillover effects, according to Amro.
“The Philippines is a very different economy from the other ASEAN (Association of Southeast Asia Nations) countries, in that it is a very services-driven economy, but has been very resilient in recent years after the big shock in 2020.” said AM’s chief economist Hoe Ee Khor in a virtual letterFing, referring to the coronavirus pandemic.
Mr. Khor said the Philippines should maximize potential investments in renewable energy sources, business process outsourcing and tourism to enhance the economy’s resilience to external shocks.
“But to do that, they have to develop the infrastructure… [It is] one of the weak points of the economy. Policymakers are aware of this and have a very ambitious infrastructure plan,” he added.
“And with that, I think the Philippine economy will grow quite quickly.”
According to Amro, the landscape in the ASEAN+3 markets has evolved since late 2023 as risks associated with high inflation and interest rates have declined, but risks associated with geopolitical issues have worsened.
The start of the US Federal Reserve’s interest rate cutting cycle in September has led to a global easing of monetary conditions, the Fed said, but the conflict in the Middle East and the upcoming US presidential election continue to pose risks to financial markets.
The dependence on the US dollar also exposes the region to risks of a potential financing gap and the transmission of shocks during periods of monetary tightening or geopolitical tensions, it added.
The increasing interconnectedness of the ASEAN+3 economies highlights the need to “adopt a holistic macroeconomic and financial view of the region to protect against systemic risks,” Amro said.
“In the near term, authorities should remain alert to the risks of a resurgence in inflation, escalating geopolitical tensions or a global growth slowdown, all of which could test the resilience of the ASEAN+3 financial system. Given the increased interconnectedness of financial systems, continued monitoring of international spillovers is essential, along with strengthening ASEAN+3-oriented surveillance and cooperation. This includes enhancing cross-border supervision, data sharing, regional stress testing, home country supervision and liquidity support to effectively manage and mitigate potential spillover risks,” said Mr Khor.
“To improve resilience to external shocks within the dollar-dependent environment, ASEAN+3 economies should strengthen their economic and financial foundations, strengthen supervisory frameworks for monitoring US dollar liquidity conditions, strengthen macroprudential frameworks for banks and NBFIs (non -bank financial intermediaries) and provide financial support to Member States experiencing liquidity problems in the US dollar. In addition, reducing structural dependence on the US dollar in the medium to long term, by encouraging the use of local currencies and establishing multi-currency 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 seriously affected the financial health of property developers, leading to declining profitability, liquidity and debt servicing capacity,” said Amro.
“Although to a lesser extent than the Plus-3 economies (China, Korea, Hong Kong, Japan), ASEAN economies such as Cambodia, Malaysia, the Philippines, Thailand and Vietnam face similar challenges with high unsold inventories and/or delayed projects,” it said.
Still, Mr Khor said risks to financial stability in the region appear to have diminished this year compared to the situation in 2023.
“The current environment of robust growth and disinflation presents an opportunity for regional policymakers 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 increase market confidence and provide supportFfer against extreme market volatility,” he said.
“To address the risks and challenges to ASEAN+3’s short- and long-term financial stability, the region must come together as one and strive for resilience and stability,” Mr Khor added. — Beatriz Marie D. Cruz