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Oil-importing Philippines is the biggest beneficiary of sliding oil prices but there is little reason to be overly optimistic over crude prices because some windfall may be negated by waning exports, according to Swiss investment bank UBS.
In a research note dated Dec. 18 written by economist Edward Teather, the bank said the Philippines was seen being pulled in two directions.
It said there were signs of diminishing returns to lending and a maturing credit cycle, not the least of which was the “surprisingly feeble” 5.3 percent year-on-year third quarter gross domestic product (GDP) growth versus the consensus expectations of 6.6 percent.
“We note short-term interest rates are already picking up in selected countries, including the Philippines, which will act as a drag on credit growth in 2015,” the report said.
At the same time, it noted that the Philippines was a great beneficiary of lower oil prices, which meant that a more benign inflation trajectory would ease pressure on the Bangko Sentral ng Pilipinas to raise policy rates, in turn boosting growth. A decline in global oil prices to $65 a barrel from more than $100 could boost the country’s GDP growth by 1.4 percentage points.
“However, we are cautious about the benefits of lower oil prices, not least because global demand must be playing a role, and think that ultimately the maturing credit cycle will dominate the outlook in 2015 and 2016,” the report said.
While some of the factors that weighed down growth in the third quarter were temporary, UBS said it was not surprised that strong credit growth was failing to deliver strong economic growth.
“Officials blamed government consumption for the slowdown—but it couldn’t explain the whole story as private consumption, exports, and inventories also slipped,” it pointed out.
While credit growth was still high, it said this was no longer accelerating. After picking up from nearly 10 percent in the latter part of 2012 to 18 percent in 2013, the report noted that private credit growth had stabilized at these levels in 2014.
“A combination of stabilizing credit growth and diminishing marginal returns indicate that the credit cycle might be peaking. A pick-up in interest rates could retard credit growth in 2015,” it said.
The report explained that lower inflation might mean the BSP was unlikely to raise policy rates soon but market rates were moving higher regardless of this, consistent with less favorable financial market conditions and higher US rates in 2015.
“All else being equal, oil prices falling 40 percent should be good for the Philippines,” the UBS research note said.
“Of the 42 countries estimated, the Philippines came out as the number one beneficiary of lower oil,” it said, but cautioned that there was cause for concern on this.
Apart from being a supply-glut driven move, exacerbated by the unwillingness of the global oil cartel to cut output, UBS feared there was a lack of demand from China, Europe and Japan.
“Some of the windfall from lower oil is likely to be offset by waning exports—half of the Philippines exports go to China, Europe and Japan (a quarter to Japan alone). Further, the large current account surpluses enjoyed by the petroleum exporting nations are fast disappearing and with them the tide of capital flows into emerging markets. A reversal of these flows is likely to be uncomfortable,” it said.
“Lower oil is not a panacea for emerging market ills. When combined with the broad weakness in third-quarter GDP and a slower credit outlook, we see little reason to be getting overly optimistic because of oil,” the report said.
UBS’ 2015 GDP growth forecast for the Philippines is 6 percent, described as still “lively” but slowing down from the peak of 7 percent average growth in 2012 and 2013.