PH is Asia's most insulated economy to external risks

The Philippines shouldn't worry about financial stability risks at this point, unlike its Asian counterparts, according to Johanna Chua, Citi managing director and Asia-Pacific head of economic and market analysis.

This as the Philippines continues to enjoy sound fiscal management, strong growth, and stable primary surpluses, allowing the debt-to-GDP ratio to continue to decline.

Chua cited two regional risks: first, the slowdown in China, though still viewed to be at tolerable levels by authorities; and second, the tapering of the US Federal Reserve’s bond-buying program.

As markets brace for the liquidity withdrawal, they can expect a weaker foreign exchange (FX) to loosen monetary conditions.

“Our view is that inflation for most countries in Asia, including the Philippines, can absorb this FX weakness. The sudden reversal of capital flows may hurt the domestic growth of some markets, but the Philippines is in better shape," she said.

"And if we look at and combine both risks, the Philippines stands out as the country most insulated to both, with macroeconomic and financial stability intact," she added.

Chua welcomed the Philippines' proposed 15% spending increase in 2014. Citi viewed the resulting fiscal gap to still be prudent due to buoyant revenues.

Chua also noted that balance sheet concerns from FX weakness is also a non-issue. "The Philippines is an increasing net creditor nation," she said.

Citi cited two key catalysts for the Philippines' investment-led recovery: fiscal spending with strong bias toward infrastructure; and rising investment approvals.

She said this is the first time that they are seeing infrastructure spending to have a prominent share in capital outlays, exceeding the share of interest payments.

"Fiscal expenditures accounted for the fastest-rising demand component in the first half of 2013. The sustained improvements in collection efficiency have resulted in a rising tax-to-GDP ratio. We noted that the 2013 budget retains a bias for infrastructure spending," she said.

Citi also noted the rising contribution of FDI approvals when charted over the past two to three years.

“Clearly, the investment credit rating will help spur investment-driven growth. Historically, most investment-grade countries attracted billions of dollars of FDI over time... While some challenges remain, including how to address perceptions when it comes to the relative ease of doing business here, as reported in the World Bank 2013 survey, the stage is set for an investment-led recovery, and we believe the Philippines has started to take off," she said.

Original Source: