Euro zone headwinds 2

PHILIPPINES - In Brief 01 Jul 2015 by Romeo Bernardo

Five years ago, tremors from Europe’s troubled periphery countries[1], originating in Greece, rocked global financial markets. While this led to some volatility in local financial markets, the impact was temporary and the magnitude of asset price declines relatively small, reflecting the minimal direct trade and financial linkages between these economies and the Philippines.[2] This is still true today (Table 1). Moreover, the local economy has since fortified its firewalls with ample international reserves and reduced external and public indebtedness, while continuing to enjoy current account surpluses, low inflation and improved economic growth (Table 2). These help to differentiate the Philippines from other emerging markets and limit the spread of a prolonged crisis on the real sector. Of course, in a risk-off environment, we do not expect the Philippines to be exempt from capital flow reversals and financial market volatility as seen in 2010 and in the past days leading up to Greece's debt default. In fact, there is much uncertainty at this time with respect to a possible "Grexit" and its repercussions on the euro zone. A wider European crisis that threatens the still weak recovery of EU economies will have knock-on effects on the Philippines in light of the country's trade and financial ties to the region. [1]The so-called “PIIGS” referring to Portugal, Italy, Ireland, Greece, Spain [2] See Monthly report, “Euro zone headwinds”, 28 May 2010.

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