By means of Luisa Maria Jacinta C. Jocson, Reporter
A SLOW DOWN in U.S. consumption could hurt Philippine remittances and exports, although still offset by domestic risks, Fitch Ratings said.
“Fitch expects some of the key impact channels to come through weaker US demand for goods imports and outbound tourism, lower remittances and e-commerce.Fimpact on financial channels and commodity prices,” the report said.
The ratings agency expects U.S. consumption growth to slow gradually over the next 12 months, decelerating from 2.2% this year to 1.4% in 2025.
“A noticeably sharper slowdown could have a major impact on emerging market sovereigns, although we view this risk as low,” it added.
U.S. consumer confidence fell by the most in three years in September, reflecting rising concerns about the labor market, even as more households planned to buy a home in the next six months, Reuters reported.
The Conference Board’s consumer consumptionFThe Identity Index fell to 98.7 last month, compared to an upwardly revised 105.6 in August. The drop was the biggest since August 2021. Economists polled by Reuters had forecast the index would rise to 104 from the previously reported 103.3.
The Philippines is among the countries that may experience antici spilloversknocked weakness, according to Fitch Ratings.
“The report lists the Philippines as among countries with relatively smaller, but still potentially significant, exposure to U.S. consumer spending,” Krisjanis Krustins, director of Fitch Ratings’ Asia-Pacific Sovereigns team and lead analyst for the Philippines, said in a report. e-mail.
The report showed the impact of subdued consumption on various channels in emerging markets (EM) such as the Philippines, such as exports. “The US is the most important export market for many emerging countries, so weaker US domestic demand could have a significant impact on their export earnings,” the report said.
It noted that the Philippines is among countries where merchandise exports to the US account for 3 to 5% of economic output. This indicates a “slightly lower, but still potentially significant exposure.”
The latest data from the local statistical authority shows that the United States remained the top destination for Philippine goods in July, with exports worth $1.06 billion, accounting for 16.9% of the total for the month.
“In some cases, such as China, this measure may understate exposure because merchandise exports to other countries may be part of industrial supply chains that ultimately depend on U.S. consumer demand,” Fitch Ratings said.
Meanwhile, remittance inflows may also be dampened by the expected slump in US consumer demand.
“A slowdown in U.S. consumption generally impacts broader U.S. economic activity, with negative consequences for the country’s labor market and income growth.”
Fitch Ratings said this could impact the value of remittances to emerging markets “as a large share of migrant workers are employed in service sectors that are more likely to be affected if consumption slows.”
“The large migrant and diaspora communities in the US also make the country an important source of remittances for many other emerging countries,” the report said. “These include both countries where remittances are large as a percentage of GDP (gross domestic product) – such as in Armenia, Cape Verde, Georgia, Ghana, Nigeria, the Philippines and Tunisia,” it added.
Data from the Philippine Central Bank shows that remittances from overseas Filipino workers (OFWs) increased 2.9% to $19.332 billion between January and July. The US accounted for 41.1% of remittances.
In 2023, personal remittances reached a record $37.2 billion and accounted for 8.5% of the Philippine economy.
“Nevertheless, we believe that a major impact on US labor markets would likely be required to have a significant impact on US cash flows,” Fitch Ratings said.
“Remittances tend to be resilient and more stable than capital flows because they are influenced by many factors beyond economic activity levels in the source country, including altruistic motives driven by conditions in the receiving country,” the report said. “Remittances held up well during the economic disruption related to the COVID-19 (coronavirus disease 2019) pandemic.
Meanwhile, Mr. Krustins said domestic factors continue to pose a greater risk to the Philippines than external headwinds.
“Still, domestic demand is currently the main driver of 5 to 6% growth in the Philippines, so in terms of magnitude, more local risks represent the main potential downsides,” he said. “This could include a new spike in inflation, which has weighed heavily on consumer spending. The climate is also a persistent risk.”
Inflation fell from 4.4% in July to a seven-month low of 3.3% in August. The central bank expects inflation to stabilize at 3.4% this year.
“Structurally, one of the key challenges facing the Philippine economy is to address weaknesses in the infrastructure, human capital and regulatory framework to enable greater private and foreign investment; If this does not happen, growth could stabilize at a lower level,” he added.
The government aims to spend 5-6% of economic output on infrastructure annually.
DOLLAR WEAKNESS
Meanwhile, emerging market currencies could get a boost from a weaker U.S. dollar, Fitch Ratings said.
“A sharper-than-expected slowdown in US consumption could impact the outlook for US interest rates, which could be lower than under the base case, and for the US dollar, which could be weaker as a result,” he said. the report.
“A weaker US dollar could support export competitiveness in emerging countries with dollarized economies. It would also reduce the burden of repaying US dollar-denominated local currency debt,” it added.
Mr Krustins said the start of the US Federal Reserve’s interest rate cutting cycle would also support the peso.
“The start of the Fed’s easing cycle should generally support the value of the Philippine peso, similar to other emerging market currencies. The peso has indeed strengthened since its weak point in June,” he said.
The Federal Reserve last month cut interest rates by 50 basis points to 4.75%-5%, the first cut since 2020 that Fed Chairman Jerome H. Powell said was aimed at demonstrating policymakers’ commitment to a low unemployment rate to maintain.
“However, we expect the Bangko Sentral ng Pilipinas to maintain a relatively low interest rate spread versus the Fed, compared to historical norms,” Krustins said. “This, combined with a shift towards a structural current account deficit, could limit the upside potential for the Philippine currency.”