PHILIPPINES

Philippines

Philippines

Introduction

The Philippines has high levels of economic, political and financial system risk. A.M. Best considers the majority of countries in Southeast Asia to be categorized as CRT-3 or CRT-4. The exceptions are Vietnam, the sole CRT-5, and Singapore the sole CRT-1.  The global economic slowdown has led to a decline in demand for exports from the Philippines. At the same time domestic consumption has slowed as remittance inflows wane. These negative factors will result in the country's economy slowing from an annual growth rate of around 4% in 2008 to 0% for 2009 and then return to modest positive growth in 2010. (IMF 2008)

Economis Risk

Agriculture, food processing, textiles, electronics and automobile parts are the driving industries of the Philippine economy. The islands also have significant mineral and natural gas reserves that have yet to be exploited.  Approximately one third of the Philippine population is younger than the working age of 15. Inflation became a major concern in 2008 reaching double digits. However, a significant slowdown in economic growth will lower inflation back to single digits. (Balisacan Hill 2003 pp. 496.)

Political Risk

Political stability is a challenge in the Philippines where President Gloria Arroyo, who took office in 2001, has weathered multiple impeachment and coup attempts. The Philippines has worked to build close ties with neighboring countries in Southeast Asia through the Association of Southeast Asian Nations (ASEAN). Domestic insurgencies, terrorism and security issues negatively impact the Philippines' ability to attract muchneeded foreign investment. (Tabuga 2008)

Financial System Risk

The Philippine insurance sector is regulated by the Insurance Commission, which is under the Department of Finance, according to the provisions of the 1974 Insurance Code. Government involvement in the economy remains high and attempts to liberalize the economy have been unsuccessful to date. (Yang 2005)

Impact Of Capital Inflows In The Philippines

The drawbacks of capital inflows—which can be extended to foreign exchange inflows in general—were discussed in Section II. These include (i) imbalances that threaten macroeconomic stability become likely if the absorptive capacity of the economy falls below the level of the foreign exchange inflows; (ii) a rapid appreciation of the nominal and real exchange rates if the economy has a flexible exchange regime; a substitution of domestic savings by foreign savings, which would only facilitate a consumption boom; (iii) microeconomic distortions such as asymmetric information that normally result in an inappropriate assessment of risk exposure and cause over-borrowing; and (iv) distortions from the real sector where aspects such as imperfect competition, externalities or wage rigidity, may result in inappropriate private sector adjustment such as wrong choice of technology even if the financial sector is functioning well. Meanwhile, in the event of a sudden capital outflow, these distortions would induce exchange rate overshooting, making the economic adjustment more difficult. (Balisacan Hill 2003 pp. 496.)

Exchange Rate

The most controversial aspect of foreign exchange inflows, arguably, has been the sharp appreciation of many Asian currencies in nominal and real terms from 2004 up to the present The peso started appreciating sharply vis-à-vis the US dollar only in December 2005 and even then it was the Asian currency with the most rapid appreciation during the period 2003-07. As a matter of fact, the peso had the fastest nominal appreciation in 2007. Based on the literature review and econometric evidence, the knee-jerk ...