Bangko Sentral seen keeping rates unchanged

Global investment bank JP Morgan sees the Bangko Sentral ng Pilipinas keeping its monetary settings steady following the stronger-than-expected second quarter growth of the Philippine economy.

JP Morgan also expects the country’s gross domestic product (GDP) growth to ease in the second half of the year to a level that will still allow the country to post an above-trend growth rate of 7.1 percent for the whole year.

“GDP growth in the Philippines has surprised on the upside for most of the last year and a half. In 2012, most of the upside surprise came from fixed investments while this year, it came from government spending,” JP Morgan economist Matt Hildebrandt said in a research note dated Aug. 29.

“We expect spending in both components to continue to grow but the pace will likely moderate. Thus, unless exports or private consumption provide boosts, we expect growth to moderate from the above potential 7.6 percent average pace in the first quarter to a more trend-like average of 5.3 percent in the second half,” Hildebrandt said.

With government spending and fixed income investment likely to contribute less in the second semester, Hildebrandt said overall growth would likely cool but the economy could still expand by 7.1 percent for the whole year to beat the 6.8 percent posted last year.

“With growth still strong and inflation benign, we see no reason for the BSP to change its policy rate the rest of the year,” he said.

“At the same time, with capital flowing out right now and sterilization costs less of an issue following the cuts in SDA (special deposit account) rates earlier this year, there is no immediate need to adjust the SDA rate either,” he added.

The next policy rate setting of the BSP is on Sept. 12. The BSP has slashed the rate on SDA—the mechanism through which it borrows from the broader market—by 150 basis points earlier this year but kept all key rates unchanged  in recent meetings.

For the first quarter, the economy expanded by 7.5 percent, the fastest in Southeast Asia. This rate also beat JP Morgan’s outlook of 7.3 percent for the period.

Similar to the first quarter, the JP Morgan research note said domestic demand had driven growth in the second quarter while external demand was a drag.

He said the country’s second quarter growth profile looked similar to the first quarter, with government spending posting strong growth for a second straight quarter and private consumption rising at the same pace as the previous quarters.

Government spending in the second quarter was up by 25 percent quarter-on-quarter based on seasonally adjusted annual rate versus 29.9 percent in the first quarter, he noted. Private consumption, which accounts for some 70 percent of the GDP, rose by 4.7 percent.

Exports were down by 8.7 percent compared to the 20.3 percent decline in the first quarter while imports fell by a modest 0.8 percent versus a larger 12.3 percent fall in the first quarter. As a result, the drag from net trade moderated, the economist said.

“The only big difference was fixed investment, which after surging by 95.8 percent in the first quarter, showed payback in second quarter by shrinking 33.1 percent. This series tends to be volatile so we are not reading too much into the choppiness,” Hildebrandt said.