Upcoming US rate hikes to test PH economy, says BSP
Uncertainty over the pace, timing and magnitude of monetary policy tightening in the US and other developed economies is one of the greatest challenges faced by the local economy where corporate and individual borrowers remain sensitive to interest rate hikes.
Thus said Bangko Sentral ng Pilipinas Governor Nestor Espenilla in response to questions about the emerging trends the Philippines was facing over the medium term during a recent interview with international risk advisory firm GlobalSource.
At the same time, the BSP chief noted that the Philippines also faced the challenges brought about by regional integration and disruption brought about by rapidly evolving financial technology.
“Potentially divergent monetary policies of advanced economies would likely trigger bouts of volatility in the financial markets,” Espenilla said, explaining that since small open economies like the Philippines were price takers rather than price setters, tighter monetary policy abroad would lead to higher cost of financing locally, which would lead to higher debt service burden for borrowers with repriceable debt and for future borrowers.
“But the Philippines is in a position of strength, we have enough buffers and policy levers to mitigate the impact of such risk,” he said. “We are among the fastest growing and most resilient economies in Asia and perhaps the world, macroeconomic fundamentals are solid, inflation is low and stable, and the banking system is strong.”
Nonetheless, he said regulators had “no room for complacency” and that the BSP stood “ready to deploy the full array of our monetary policy toolkit to deal with possible market volatility as policy settings evolve and normalize in the US and other advanced economies.”
“We are also watchful of geopolitical risks that could pose challenges to the country’s trade, remittances, and foreign direct investments,” he said.
The central bank governor also pointed out that the integration of various economies of the Asean region also gives rise to uncertainties given the varying degrees of economic advancement of Asean countries, as well as varying sizes and capacities of banking systems.
“A huge challenge is the diversity of Asean economies that make standardization of policies difficult,” he said. “There are also risks associated with potential crisis spillovers and contagion, capital flow volatility arising from easier movement of funds across borders.”
He noted that the local financial sector is challenged mainly by the prospect of a higher degree of cybercrime with the rapid developments in financial technology.
“Digital innovations pose various IT risks including cybercrimes. But there are also huge opportunities from financial technology or fintech, including acceleration of financial inclusion,” he said. “Given this, the BSP widely supports digital innovations in the financial sector while putting in place a regulatory environment that requires its regulated institutions to set up proper risk management systems.”
