The Philippine president's expletive-laden outbursts inrecent weeks, taking aim at targets including the U.S. president and theCatholic Church, have fanned an already volatile trading environment, with thelocal currency tumbling to new lows and investors fleeing the stock markets.
The Philippine peso has fallen to a seven-year low, downabout 5% against the U.S. dollar from its peak of 45.84 pesos on June 8, whilethe Philippine Stock Exchange Index has been steadily sold down since July,starting August above the 8,000 mark but closing at about 7,600 in earlyOctober. The index closed at 7,620.16 on Oct. 6.
Concerns about President Rodrigo Duterte's provocativestatements since assuming office in June have unnerved investors. Duterte hasdrawn international criticism for his war on illegal drugs in the country,which has killed 3,684 people since July 1, according to Philippine NationalPolice numbers. His foul-mouthed outbursts against U.S. President Barack Obama,likening himself to Adolf Hitler, and threats of a foreign policy shift towardstrengthened relations with Russia and China have only added to investoruncertainty.
The main factor behind the stock market's underwhelmingperformance is mainly political, Jeffrey Halley, market strategist at OANDAAsia-Pacific, told S&P Global Market Intelligence. "The main show isdefinitely the president and his constant soundbites… all these comments areactually spooking investors. He's a bit of an unknown quantity to the rest ofthe world," Halley said.
Investor concern also manifested in an increase in the costto insure Philippine sovereign bonds, as seen in the midpoint of quotes forfive-year credit default swaps, which has risen since September.
But while Duterte is certainly a factor in the stockselloff, Mark Mobius, executive chairman at Templeton Emerging Markets Group,also attributes the recent market battering to other factors. He cites theprofit-taking behavior of investors who see that the Philippines is expensiverelative to emerging markets generally, with a P/E ratio of about 18x versus12x, as well as the weakening of the peso, which has continued on a decliningtrend since its peak in 2012.
Outside of the Philippines, what the U.S. will do with itsrates affects the peso, like other emerging currencies. "The level of thepeso, to a certain extent if we take out short-term comments by the Philippinepresident, is being driven by external factors beyond its control," Halleysaid. The results of the U.S. presidential election and the U.S. FederalReserve's decision on a rate hike will have significant repercussions foremerging markets, he noted.
Yet Mobius remains bullish about the Philippines' investmentprospects. He believes the country will emerge as an improved destination forinvestors despite Duterte's actions. "The concern about the illicitkillings is a minor issue. The big issue is how they implement true law andorder and the degree to which Duterte is able to do that," he said in hisremarks at the Asia Private Equity and Venture Capital Summit, as reported byCNBC on Oct. 1.
Mobius told S&P Global Market Intelligence that thePhilippines remains one of the fastest-growing economies in the world, with2016 growth projected at 6%. The budget deficit as a percentage of GDP haslowered over the last eight years, while unemployment continues to improve.
The World Bank has estimated that the Philippines' annualGDP growth rate could exceed the 6.2% currently projected for 2017-2018 ifuncertainties surrounding the government's reform agenda are quickly resolved.
And while its relationship with the U.S. has been verystrong over the last few decades, it makes sense for the country to shift gearsto a more diversified approach in foreign relations in view of China andRussia's roles in the global economy, Mobius said.
Halley agrees that the Philippines' outlook for thelong-term is rosier than the current turbulence would indicate. "It's notlike the Philippine government is doing anything wrong economically," hesaid.
As of Oct. 6, US$1 wasequivalent to 48.37 Philippine pesos.
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