BPI: PH need not fret over Fed QE decision

While global markets are getting jittery over the US Federal Reserve’s current monetary policy—the unwinding of its aggressive bond-buying program that may take longer than expected—the Philippines’ strong economic fundamentals will continue to buoy local assets, said an economist of Bank of the Philippine Islands.

In a commentary dated June 13, BPI lead economist Emilio Neri Jr. said the Bangko Sentral ng Pilipinas’ decision to keep its key policy rates steady was in reaction to the volatility in global financial markets.

At the same time, Neri said, the BSP likely will assess further the impact of the 150-basis point cumulative reduction in its special deposit account (SDA) rate early in the year and the recent restrictions it imposed on this instrument.

The SDA is a facility where the BSP borrows from the broader market. It has so far locked up close to P2 trillion in excess liquidity from the local financial system. This facility was introduced in late 2008 when the BSP’s short-term borrowing window was no longer considered sufficient to manage the country’s liquidity growth.

In light of the recent developments in the global financial markets, Neri’s research team revised its projections for 2013. It curbed its outlook on the appreciation of the peso against the US dollar. BPI now expects the local currency to end the year at 41.50, weaker than its forecast of 40.50 to the greenback at the start of the year.

Neri said the possibility of a yearend peso exchange rate stronger than 41 against the US dollar had “diminished significantly,” as external markets’ sentiment tilted toward a strengthening greenback.

Also, BPI remains optimistic on Philippine assets—government securities, offshore global cash bonds or ROPs and stocks.

“We continue to believe that funds are more likely to return to where fundamentals are strongest. In other words, Philippine markets are likely to benefit once investors realize that the Fed (US Federal Reserve) tapering and the eventual end to QE (quantitative easing) will take much longer than what markets seem to be currently pricing in,” Neri said.

The US Fed’s three rounds of aggressive bond buyback activities had helped boost global financial markets in the last few years. However, uncertainties had cropped up in recent weeks on whether the US Fed would pull the plug, resulting in massive profit-taking by global funds especially in top-performing emerging markets.

The BSP, for its part, decided during a meeting last Thursday to keep its special deposit account steady at 2 percent, as well as its overnight borrowing rate at 3.5 percent despite the benign inflation environment and the deceleration in the growth of domestic liquidity.

Based on a Bloomberg survey, 7 of 16 analysts believed the BSP would reduce the SDA rate to 1.5 percent, while all analysts projected overnight policy rates to stay steady.

Neri said the BSP would likely wait for a more stable global financial condition before it could adjust its monetary policy.

“With exchange market pressure dominating the region in the past two weeks, the BSP probably thought it prudent to stay neutral until they ascertain whether recent developments are temporary or more persistent in nature,” Neri said.

He added that the Bank of Indonesia’s decision to hike its policy rate less than three hours before the BSP’s decision could have been a deciding factor for the Bangko Sentral.

From hereon, Neri said, the BSP would likely observe the impact of its cumulative 150-bps reduction in the SDA rate since 2012, alongside a recent directive to limit access to its SDA facility to more specific types of transactions.