Today’s US Federal Reserve decision raising rates after almost a decade of near-zero rates is necessary to prevent mispricing of risks and assets. It has also been widely expected, and thus, has allowed markets to price in its effects. Indeed, we have seen the impact of the anticipated liftoff across the region– but after the usual knee jerk reactions, proof emerges that markets do differentiate economies based on fundamentals.
The Philippine peso counts among the few who have depreciated the least so far in the region, and the country has experienced less volatile capital flows as well. This owes squarely to the solid macroeconomic fundamentals good governance has sowed for our people.
We are confident our economy is resilient from increased rates. The Philippines has been a current account surplus country for 12 straight years, and we expect this record to be maintained further by falling oil prices. We are on track to post a surplus of $14.2 billion this year, equivalent to 4.4% of GDP. Foreign reserves remain ample at $80.6 billion, able to cover 10.3 months of imports as of end-November 2015.
As we have long watched this development closely, today’s liftoff will not change our financing plans. We have taken care to do our homework: for example, our general government debt to GDP ratio is now at 36.2% from 44.3% in 2009. I believe our borrowing costs will continue to narrow because of positive investor sentiment on the back of good fundamentals.
Proactive debt management strategies lengthened our average debt maturities (mitigating refinancing risk) and increased the share of local currency debt (reducing foreign exchange risk). Further, work in developing and deepening the capital markets for the long term is expected to improve liquidity as we enlarge the share of domestic financing in our debt profile. I note further that the private sector has become more prudent in liability management decisions. Keeping the Philippines a safe harbor in uncertain times is a continuing partnership with our people.
In terms of growth prospects, we are likewise optimistic amid this development– we have a robust domestic consumption core, demand fueled by the twin revenues from remittances and BPOs. Exports will remain resilient as we have diversified both product base and markets.
All signs show that we continue to grow well within our means. We ended the first 3 quarters of the year with a deficit of 0.27% of GDP, and in the same period also increased the ratio of our tax collections to GDP, from 12.1% in 2010 to 14.2%. Progress on our priority legislative measures (Tax Incentives Management & Transparency Act as well as the Customs Modernization & Tariff Act) are expected to build on earlier revenue reforms such as the Sin Tax Law.
If a liftoff is any indication of a stronger US recovery, this bodes well for us: the US is one of our largest trading partners (2nd as of Sept 2015); source of visitors (2nd largest as of September 2015); and FDI (top FDI source as of August 2015).
Moving forward, we will closely watch the pace of tightening alongside other developments in the volatile landscape of the global economy. We will remain opportunistic in our funding strategy, carefully monitoring market developments including further signals for rate path clues.
Credit ratings agencies have cited the Philippines as the least vulnerable in the region vis-á-vis the rate hike; we expect our sovereign ratings to further improve as we sustain reform-driven governance in the Philippines.