Fed's rate cut may bring emerging markets relief
August 20, 2007
By Bloomberg and AFP
Manila and Hong Kong - The US Federal Reserve's decision to cut the interest rate it charges banks may help restore liquidity to the financial system and provide relief to emerging markets, according to Philippine central bank governor Amando Tetangco.
"A favourable outcome will tend to provide relief to emerging markets, including the Philippines, which, while having no significant exposure to collateralised debt obligations [CDOs], have been affected by risk aversion," Tetangco said yesterday.
"When the external factors settle down, the local market as well as international investors will again look at fundamentals, which, in our case, continue to be sound."
On Friday the Fed unexpectedly lowered its discount rate, the rate it charges to lend money to banks, by 0.5 percentage points to 5.75 percent. It acknowledged for the first time that an extraordinary policy shift was needed to contain the US subprime mortgage collapse that triggered liquidity concerns and a rout of global stock markets.
Tetangco said: "I believe this will help bring back order in the US markets and this will alleviate some of the risk aversion that may have filtered into our own market."
The Philippine Stock Exchange index slumped 12 percent last week, erasing more than $10.5 billion (R77.3 billion) of market value.
Only 0.2 percent of assets of Philippine banks were invested in CDOs, "which don't contain any subprime" debt, Tetangco said on Friday.
Asian stocks had their biggest weekly drop in 17 years last week before the Fed lowered the discount rate, as worries of a credit crisis prompted investors to shun riskier assets such as equities. The Morgan Stanley Capital International Asia-Pacific index lost 8 percent, erasing all this year's gains.
Plunging share prices have raised the spectre of a financial crisis, but analysts say Asia's economies are healthy and can weather the crisis.
"The Asian market fell because of somewhere other than Asia," said Dong Tao, the chief economist at Credit Suisse. "This is a US problem and Asian fundamentals remain strong."
The Fed's rate cut could help sentiment in Asia, where the selloff has put investors in mind of the 1997 financial crisis. But Tai Hui, an economist at Standard Chartered, said Asia's position was much more robust than in 1997.
Many Asian countries have stockpiled foreign exchange reserves to defend their currencies. The region's economies and firms have been doing well.
The fear for Asian stocks is that foreign investment funds will have to keep off-loading shares to cover losses in the US subprime mortgage market, and in the securities that are built on the back of it.
Until the extent of that exposure was firmly established, credit could dry up and Asian markets suffer, Tai said. "The lack of information about where people are exposed means that there is no real risk profile. We have these credit derivatives packaged in such a complicated way that you now have markets trying to assess the real risks."
Asian economies depend on exports to the US, so any hint of a US consumer slowdown could hit Asia. "The entire world is too exposed to the US, less on the financial side, more on the export side," Dong said. But a major difference with 1997 is the new-found strength of China.
Li Kui Wai, a specialist in Asian markets at Hong Kong's City University, believes this will provide a healthy counterbalance to US weaknesses. "Investors in China are full of cash; therefore it can be very powerful. China will act as a stabilising force."
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