US multinational investment bank Goldman Sachs said the exchange market pressure (EMP) in emerging markets (EM) including the Philippines — which have surplus external accounts and reserves — have lessened despite current EM volatility.
In its latest Global Macro Research report, Goldman Sachs noted that emerging markets’ EMP are easing but with “differentiating pressures” depending on an EM’s surplus or deficit current account condition.
“Our model suggests that pressures in exchange markets could ease broadly across EM in the near term but remain elevated for some deficit countries, with the extent of pressures depending on individual country characteristics,” said Goldman Sachs’ Goohoon Kwon.
Goldman Sachs’ EMP monitoring includes currency depreciation, reserve losses, and interest rate hikes all in percentage terms to “reflect policy reactions.”
Assuming continuation of what Kwon refers to as “recent macro trends, rising long-term US Treasury rates and a modest gain in the GLI (global leading indicator) momentum,” he said pressures on EM currencies are expected to “fall gradually” but the pressure will “likely remain elevated for some deficit countries (Argentina, Turkey and Indonesia).”
Goldman Sachs listed the Philippines as “group 2” or the surplus countries which also include China, Korea and Malaysia. The “group 1” countries with current account deficits are Brazil, India, South Africa, Indonesia, Argentina and Turkey.
As a surplus EM, the Philippines’ EMP has also increased but Goldman Sachs also noted that the movement was “considerably less” than the volatility recorded in June, 2013 when the US Fed first sent out feelers that it was reducing its bond-buying program. This apparently showed initial signs of “delinking,” said Kwon, or correlations between EMPs of current account deficit EM and surplus EM have been “trending down”.
“Pressures on exchange markets in EM have resurfaced recently with some differentiation across countries,” Kwon commented. While the EMP of surplus countries showed some delinking, Goldman Sachs’ measure of EMP for countries with current account deficits “shot up again” in January, 2014 as a reaction to the US Fed tapering. He said initial spikes were evident in June 2013 and then continued on in August and November last year.
As the near-term EM exchange market outlook seem to be easing, the report further noted that the continued volatility in EM countries and the “market concerns about contagion risks” have prompted an expansion of the EMP model to include EM outside the region. The reason for this as stated was that EMP could still show more easing but per country basis.
“(The) main drivers for EMP differ by countries,” the report said, citing some of their findings. “EMPs of most Asian EM countries, except Indonesia, Malaysia and China, tend to respond strongly to changes in current accounts while developed Asian economies (Australia and New Zealand) do not.”
In comparison, Goldman Sachs explained, the non-Asian deficit EM Argentina, Brazil, South Africa and Turkey do not exhibit “as much sensitivity” in their EMP current accounts compared to Asian markets. “(This is) possibly reflecting the strong role played by capital flows in those economies in slowing down adjustment in their current accounts.”
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