PH, neighbors face overheating threats, World Bank warns

MANILA, Philippines–The World Bank has warned that the Philippines, together with a few other Asian countries, are facing threats of “overheating” and suggested that policymakers now shift focus from boosting economies to containing the buildup of inflationary pressures.

“Though the developing economies of East Asia are generally well-prepared to absorb external shocks, an emerging concern is the risk of overheating in some of the larger economies,” the World Bank said in its latest outlook report for East Asia and the Pacific officially released Monday.

The bank said measures previously implemented to fuel economic growth of the concerned countries are now ripe for withdrawal. It explained that robust growth rates could eventually lead to inflationary problems if policies would remain the same.

“Continued demand-boosting measures may now be counterproductive. Counter-cyclical demand policies have helped sustain growth, but they may now risk stoking inflationary pressures and amplifying the credit and asset price risks that are emerging in the context of strong capital inflows into the region,” the World Bank said in the report.

In the case of the Philippines, the Bangko Sentral ng Pilipinas had brought down interest rates to historic lows in 2012 in a bid to accelerate growth of the domestic economy despite the drag caused by crises in the euro zone and other industrialized countries.

The BSP cut interest rates four times last year for a total of 100 basis points, bringing its overnight borrowing and lending rates to record lows of 3.5 and 5.5 percent, respectively.

Aided partly by higher loan demand resulting from the low-interest rate environment, the Philippines grew by 6.6 percent last year to beat most projections, including the government’s own target of 5 to 6 percent. The World Bank said the country is poised to keep its growth rate at the 6-percent territory, maintaining its previous projections of 6.2 percent for this year and 6.4 percent for 2014.

The World Bank said output gaps in the Philippines and some of its neighbors have narrowed, adding this indicates demand is rising much faster than the increase in supply and productive capacities of the economies.

“The latest numbers suggest that if global demand continues to revive, the major East Asian economies may be reaching the limits of their current productive capacity. Comparisons of actual against potential output indicate that the output gap–a measure of how much slack there is in the economy–has virtually been closed or has narrowed last year, although to varying degrees, in China, Indonesia, Malaysia and the Philippines,” the World Bank said.

In 2012, inflation rate in the Philippines stood at 3.2 percent. This was well within the government’s target of 3 to 5 percent. The World Bank said inflation could be higher this year on the back of price pressures, including those resulting from likely increase in external demand.

The World Bank said foreign portfolio investments to emerging Asian countries are a concern given their likelihood to create bubbles in the asset market.

For instance, while government officials in the Philippines still say demand for local stocks are backed by fundamentals, the Philippine Stock Exchange Index has registered several record highs since the start of 2013.

Demand for real estate properties in the country also has escalated over the past few years, aided by rising household incomes and investments led by those from business process outsourcing (BPO) firms.

The BSP has said it still does not see risks of overheating, but officials said they closely monitoring factors affecting domestic prices. The BSP also has said it is prepared to implement policy adjustments if inflationary pressures become more pronounced.