Nomura says SE Asia susceptible to capital flight

MANILA, Philippines - Southeast Asia is among the most susceptible to capital flight once the US opted to scale down its bond buying program.

“India and Asean (Association of Southeast Asian Nations) look more exposed to capital flight from a disorderly US QE unwind than China, Korea and Taiwan,” investment bank Nomura said in a report yesterday.

On Tuesday, Dennis Lockheart, president of the Federal Reserve of Atlanta, became the latest official to suggest a possible tapering of quantitative easing (QE) — the $85-billion monthly bond buying program— as early as September.

This followed earlier statements from other Fed officials, notably US Fed Chairman Ben Bernanke, who in June, rattled world financial markets by saying the world’s largest economy may taper its bond buying activity “later this year.”

For the local economy, which grew 7.8 percent in the first quarter, a QE withdrawal posed one of the “main risks,” together with a continued weakening of global growth and a slowdown in “reforms” and infrastructure spending.

“But the Philippines is among the best positioned in Asia to weather these risks,” Nomura noted in a separate report.

For one, the country continued to boast of a “positive reform momentum,” owing to the Aquino administration’s landslide victory in the mid-term elections last May. Nomura said this would help facilitate the passage of necessary bills.

At the same time, the government has been increasing infrastructure spending, the Japanese lender said, helping support private investments to steer the economy on a faster growth path Consumption likewise is expected to remain firm, as indicated by record-high business and consumer confidence indices. This has been proven by rising imports, industrial production and cement sales.

“This provides a strong cushion against emerging external headwinds such as a potential slowdown in China and risks of capital outflows,” Nomura said.

According to its latest forecasts, Nomura expects the Philippine economy to grow 7.3 percent this year before slowing down to 6.4 percent in 2014. Private consumption could rise 5.4 percent, while gross fixed capital formation could surge 15 percent.

On prices of basic goods and services, Nomura sees inflation settling at 3.2 percent and four percent this year and the next.

“We believe BSP is done with policy easing and will likely keep the special deposit account (SDA) rate (at two percent) and the policy rate (at 3.5 percent) unchanged this year,” the bank said.

Combined with increased capital spending and rising revenues, Nomura said the Philippines would likely finally get that investment-grade status from Moody’s Investors Service soon.