Demand for RP products seen to weaken in Europe

MANILA, Philippines - The Philippines may experience weaker demand for its products exported to Europe because of the weakening of the financial markets in the euro area but this is not expected to affect the economy in general, the Union Bank of Switzerland said in its latest report on Asia.

The Switzerland-based investment bank said that with the tumbling value of the euro on the foreign exchanges, there are implications for ASEAN-5 economies including the Philippines.

“The trade implications are straightforward. A weaker euro, all else equal, implies a loss of competitiveness for ASEAN producers in European, domestic and third markets. This in turn points to a weaker growth outcome for the ASEAN economies most exposed to global trade -Singapore, Thailand and Malaysia. Indonesia and Philippines should still see reduced demand for their exports, but with less impact on the economy as a whole,” it said.

UBS expects a general weakness in the ASEAN currency against the dollar this year. It expects the local currency to hit P46 against the greenback by yearend from the current trading level of 45-to-the dollar.

There will be funding constraints, too, UBS said.

“Additionally, the troubles in Europe also raise the possibility of funding constraints or a higher cost of capital in international markets. And here we note that Indonesia and to a lesser extent Philippines continue to look more sensitive to external financial developments than Malaysia, Thailand or Singapore,” the investment bank noted.

Nonetheless, UBS said that with the US Federal Reserve and the European Central Bank showing willingness to provide a “liquidity backstop,” this would help countries such as the Philippines.

“As such, our concern that an external liquidity shock will derail the domestic growth dynamics in Indonesia or the Philippines has been greatly reduced,” it said.

UBS also noted that the Philippine central bank’s actions to prevent contagion “will be important.”

UBS said when foreign investors will pull back from emerging markets such as the Philippines because of uncertainties, the private sector can help boost liquidity by extending credit.