MANILA, Philippines – Hopes are high that leaders in the United States will strike a deal to stop spending cuts from taking effect Friday, an event that could trigger heightened risk aversion in the emerging markets like the Philippines, the central bank said.
“Given what transpired at year-end, most analysts have probably not factored in ‘sequestration’ (or the automatic spending cuts) in their baselines,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco, Jr. said.
“As in the past, I think we can expect heightened volatility in the market in the run up to March 1,” he said in a text message to reporters Tuesday night.
US lawmakers found themselves pitted against each other anew, two months after dodging the “fiscal cliff”— the $600-billion spending cuts and tax rises— by choosing to hike income taxes to generate revenues.
They however left decision on disbursement cuts, choosing to extend the leeway by another 60 days which is bound to end Friday midnight, Washington time.
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A total of $85 billion worth of cuts could kick in immediately, affecting government services and employee payrolls, seen detrimental to the still-fragile US economy.
On Tuesday, the BSP chief said the market would evaluate how the US would act to avert a looming budget problem.
“Again, what we could see in the market is a move to safe haven. But what that safe haven is would depend on risk appetite at that point,” Tetangco said.
“Given the US market is still the biggest and most liquid, we could see a shift away from (emerging market economies) risk. But if the markets believe a deal is forthcoming, then such shift may not materialize,” he explained.
The Philippines has been a darling to investors lately, allowing the local bourse to reach 21 record-highs this year and the peso to outperform other regional currencies versus the greenback.
A sudden shift of inflows could reverse this performance, hurt businesses, and take a toll on the Philippines’ economic activity, at the most.
Tetangco is optimistic a deal will be sealed just in time, but should the US fails, the most it could do is to slow down US growth, and not necessarily contract it.
The bulk of spending cuts will not take effect instantly, he argued, thus, economic activity in the US could still hold up, limiting adverse effects to trading partners such as the Philippines.
“The spending cuts won’t happen all at once, but rather over some period of time,” he said.
The US is the Philippines’ third largest export market and source of imports. In 2012, exports to the country reached $7.395 billion, while imports totaled $7.118 billion, census data showed.
Exports accounted for 14.22 percent of the total, while imports represented a 16-percent share.