Greek crisis has 'little effect' on Philippines – economists

MANILA, Philippines – Philippine stocks fell and the peso weakened on Monday, July 6, after Greece rejected bailout terms demanded by international creditors.

This was because investors exercised a bit of caution and looked for safer assets to cash in on their funds.

“The Greek problem has very little direct impact on the Philippines, but as investors take risk off the table, we’re seeing some currency-related effects,” said University of Asia and the Pacific (UA&P) senior economist Victor Abola. “The volatility in financial markets is seen to continue in the next two to 3 months.”

The benchmark Philippine Stock Exchange (PSE) index fell 80.15 points to close at 7,455.15, near the session’s low of 7,439.42. The all-shares index also went down by 55.21 points or 1.27% to end at 4,265.22.

Data from the PSE showed it had net foreign selling of P418.31 million ($9.3 million). Selling in shares of Globe Telecom, Incorporated and Ayala Land, Incorporated pulled the index to its lowest close since June 10 this year.

“The debt crisis in Greece can affect emerging markets like the Philippines as events like this would heighten risk aversion in the short term. Period of risk aversion lead to flight to quality and thus the dollar strengthened overnight,” Bank of the Philippine Islands research officer Nicholas Antonio Mapa responded via email.

“Equities are usually also sold off and we've seen both a lower PSE index and weaker peso this Monday,” he added.

Aside from the local stocks, the Philippine peso also weakened against the US dollar on Monday.

The peso lost 8 centavos to end at P45.10 on Monday from its P45.02-to-$1 close on July 3.

This was just an “expected knee-jerk reaction” to the Greece referendum result, said Rolando Dy, dean of the UA&P School of Management.

“Several players held on to cash while others reallocated funds in safer markets as European leaders figure out their next step in resolving the debt crisis,” Jason Escartin, investment analyst at online brokerage 2TradeAsia.com, said in a statement.

Understanding the Greece debt crisis

On July 5, the Greeks voted no, winning by over 61%. This means majority of Greeks supported its Prime Minister Alexis Tspiras’ rejection of further tax hikes and spending cuts.

Since 2010, the International Monetary Fund has been providing Greece with loans in exchange of spending cuts and tax increases.

This debt crisis of Greece was rooted when the country joined the Eurozone in 2001, UA&P’s Dy explained. “At first, the Greek economy grew and a big economic boom followed.”

The confidence in Greece remained for several years until the 2008 financial crisis.

Every European country suffered recession, but it hurt the most in Greece, being the poorest of them all.

In April 2015, the unemployment rate in Greece went up to 25.4%, which is worse than the US during the Great Depression.

As part of the Eurozone plan, all European countries will share a monetary policy. The European Central Bank – which is the counterpart of the Philippines’ Bangko Sentral ng Pilipinas – gave Europe a monetary policy that is tight for Greece, but right for Germany.

Because of the tight monetary policy, Greece is having a difficult time raising the money it needs to make debt payments. It has been negotiating with the IMF for financial assistance since 2010, to raise money.

Rich Eurozone members like Germany claimed that Greece should just “live within its means.” This caused bitterness among Greeks and heightened poverty and unemployment exponentially in the most indebted European nation.

In 2010, Greek debt was largely held by private banks, causing a financial panic.

Knowing that Greek euro deposits could soon be transformed into a devalued  currency, its drachma, Greeks have been rushing to banks to withdraw as much as they can.

Bank deposits also plunged to an all-time low, forcing its government to close banks and limit withdrawals to €60 per day, according to a news report from Reuters UK.

As such, BPI's Mapa said that for him, the correct answer is "no," so Greece can start over.

“Their huge public debt and broken economy will only struggle if they keep the euro,” Mapa added.

“If Greece wasn't in the euro, it could have boosted its economy by printing more of its currency, the drachma. This would have lowered the value of the drachma in international markets, making Greek exports more competitive,” Mapa explained.

Contagion effect

The Philippines has minimal trade to Greece with only 0.01% of total exports and 0.02% of total imports from Greece last year. (READ: Greek crisis has no direct impact on Philippines)

In terms of exposure, Mapa said the Philippines has zero to minimal exposure to Greece so there would be minimal contagion on that front.

“If ever there will be contagion, it should be short-lived and a buying opportunity because of our superior fundamentals,” Mapa added.

For Abola, the Greek crisis “has a little effect on us.”

Likewise, OFW remittances from Greece accounted for only 1.38% of the total in 2014.

“This is very different from Lehmann Brothers that sold bad derivatives to other banks all over the world. Greece debts mostly to governments of EU and the European Central Bank,” Abola said.

“In general, Asia seems to be less affected by the rest of Europe. Currencies reacted by weakening against safe haven like yen and US dollar but Dollar Asia retreated by a lesser extent,” Mapa said.

“While the Philippines is in a good fundamental position that any direct effect would be minimal, a prolonged crisis and eventual lumping of similar sized and structured economy could lead to some contagion effect,” Philippine Economic Society president and EagleWatch senior fellow Alvin Ang said in a mobile phone reply.

The adequate reserves that the Philippines holds serve as a buffer for external risks as well.

The Philippine central bank’s reserves stood at $80.4 billion as of May 2015, and can cover about 10 to 11 months’ worth of imports. This is also 4.5 times the Philippine debts maturing within the short term.

The government has assured as well that the country is prepared to navigate through challenges from uncertainties brought about by external risks and factors.”

“We continue to develop measures fortifying the economic fundamentals we have built, as well as increasing competitiveness in the country, reaping brighter prospects for higher and more durable growth,” Finance Secretary Cesar V. Purisima said last week. – Rappler.com