By Luisa Maria Jacinta C. Jocson, Reporter
A SLOWDOWN in US consumption might harm Philippine remittances and exports, although that is nonetheless outweighed by home dangers, Fitch Rankings stated.
“Fitch expects among the predominant channels of impression can be by way of weaker US demand for items imports and outbound tourism, decrease remittances and the effects on monetary channels and commodity costs,” it stated in a report.
The ranking agency expects US consumption progress to decelerate steadily over the following 12 months and sluggish to 1.4% in 2025 from 2.2% this 12 months.
“A notably sharper slowdown might have huge implications for rising market sovereigns, although we view this threat as low,” it added.
US shopper confidence dropped by essentially the most in three years in September amid mounting fears over the labor market, although extra households deliberate to purchase a house within the subsequent six months, Reuters reported.
The Convention Board’s shopper confidence index dropped to 98.7 final month from an upwardly revised 105.6 in August. The decline was the most important since August 2021. Economists polled by Reuters had forecast the index rising to 104 from the beforehand reported 103.3.
The Philippines is among the many nations that would expertise spillover results from the anticipated weak spot, Fitch Rankings stated.
“The report mentions the Philippines as one of many nations with comparatively smaller, however nonetheless probably important, publicity to US shopper spending,” Krisjanis Krustins, director at Fitch Rankings’ Asia-Pacific Sovereigns group and first analyst for the Philippines, stated in an e-mail.
The report confirmed the impacts of muted consumption on varied channels in rising markets (EM) just like the Philippines, reminiscent of exports. “The US is an important export market for a lot of EMs, so weaker US home demand might have important repercussions for his or her export earnings,” it stated.
It famous that the Philippines is among the many nations the place items exports to the US account for 3-5% of financial output. This means a “barely decrease, however nonetheless probably important publicity.”
Newest knowledge from the native statistics authority confirmed that the USA remained the highest vacation spot for Philippine-made items in July, with exports valued at $1.06 billion, equal to 16.9% of the whole for the month.
“In some instances, reminiscent of China’s, this metric could understate publicity as items exports to different nations could also be a part of industrial provide chains that in the end depend upon US shopper demand,” Fitch Rankings added.
In the meantime, remittance inflows can also be dampened by the anticipated stoop in US shopper demand.
“A slowdown in US consumption typically impacts US financial exercise extra broadly, with adverse repercussions for the nation’s labor market and earnings progress.”
Fitch Rankings stated this might have an effect on the worth of remittances despatched to rising markets “as a excessive share of migrant employees are employed in service sectors which might be extra more likely to be hit if consumption slows.”
“The US’ giant migrant and diaspora communities imply it is usually a number one supply of remittances for a lot of different EMs,” it stated. “These embody each nations the place remittances are giant as a share of GDP (gross home product) — as in Armenia, Cabo Verde, Georgia, Ghana, Nigeria, the Philippines and Tunisia,” it added.
Information from the Philippine central financial institution confirmed that money remittances from abroad Filipino employees (OFWs) rose by 2.9% to $19.332 billion in January to July. The US accounted for 41.1% of the money remittances.
In 2023, private remittances hit a report $37.2 billion and accounted for 8.5% of the Philippine financial system.
“Nonetheless, we imagine there would doubtless have to be a big impression on US labor markets to have a big impression on remittance flows from the US,” Fitch Rankings stated.
“Remittances are typically resilient and are extra steady than capital flows, as they’re influenced by many components past financial exercise ranges within the supply nation, together with altruistic motives pushed by circumstances within the receiving nation,” it stated. “Remittances held up effectively through the financial disruption related to the COVID-19 (coronavirus illness 2019) pandemic.”
In the meantime, Mr. Krustins stated home components proceed to pose a much bigger threat for the Philippines than exterior headwinds.
“Nonetheless, home demand is the important thing driver of the Philippines’ 5-6% progress in the intervening time, so by way of magnitude, extra native dangers characterize the primary potential downsides,” he stated. “These might embody a renewed spike in inflation, which has been weighing closely on shopper spending. Local weather can be a persistent threat.”
Inflation eased to a seven-month low of three.3% in August from 4.4% in July. The central financial institution expects inflation to settle at 3.4% this 12 months.
“Structurally, one of many key challenges for the Philippines’ financial system is addressing weaknesses in infrastructure, human capital and the regulatory framework, to allow extra non-public and overseas funding; within the absence of this, progress might stabilize at decrease ranges,” he added.
The federal government targets to spend 5-6% of financial output on infrastructure yearly.
DOLLAR WEAKNESS
In the meantime, rising market currencies might get a lift from a weaker US greenback, Fitch Rankings stated.
“A sharper-than-expected US consumption slowdown might have an effect on the outlook for US rates of interest, which might be decrease than underneath the baseline, and the US greenback, which might consequently be weaker,” it stated.
“A weaker US greenback might help export competitiveness in EMs with dollarized economies. It might additionally cut back the burden of repaying US dollar-denominated debt in native foreign money phrases,” it added.
Mr. Krustins stated the beginning of the US Federal Reserve’s rate-cutting cycle would additionally help the peso.
“The beginning of the Fed easing cycle ought to normally be supportive of the worth of the Philippine peso, just like different EM currencies and certainly, the peso has strengthened from its weak level in June,” he stated.
The Federal Reserve final month reduce rates of interest by 50 foundation factors to 4.75%-5%, the primary discount since 2020 that Fed Chairman Jerome H. Powell stated was meant to display coverage makers’ dedication to sustaining a low unemployment charge.
“Nevertheless, we count on the Bangko Sentral ng Pilipinas to keep up a comparatively low rate of interest differential with respect to the Fed, in contrast with historic norms,” Mr. Krustins stated. “This, mixed with a shift to a structural present account deficit place, might restrict the upside for the Philippines’ foreign money.”