PH ‘bright star in a dim sky’ over region, says HSBC

The Philippines is a “bright star in a dim sky” over the region and its economic fundamentals will remain robust even without any new monetary stimulus this year, an economist from British banking giant HSBC said.

In a macroeconomic research note dated Sept. 21, HSBC economist Joseph Incalcaterra said the Bangko Sentral ng Pilipinas (BSP) would likely keep its key monetary settings unchanged during its policy meeting this Thursday and keep interest and special deposit account (SDA) rates on hold for the rest of the year.

Incalcaterra said current benchmark rates were appropriate until 2016, noting that monetary authorities may prefer to save their bullets for bigger threats to the economy.

“Growth has held up and looks likely to stay robust in the coming quarters despite poor external sentiment,” Incalcaterra said.

The BSP’s main goal is to protect consumers’ purchasing power by keeping prices stable, which is done through interest rate adjustments and the management of the nation’s money supply.

HSBC said with inflation at a record low of 0.6 percent in August, some may think the central bank has room to ease policy.

Low inflation allows the BSP to cut interest rates to stimulate domestic demand.

Incalcaterra said, however, that “growth has held up and liquidity is abundant, while El Niño and drought suggest higher food prices into 2016.”

El Niño, which threatens to dry up farm lands and eat into food production, can lead to higher inflation.

Benchmark overnight borrowing and lending rates set by the BSP currently stand at 4 and 6 percent, respectively.

Both are just half a percentage point above their respective record lows.

Incalcaterra said there was little cause for rate adjustments, given the economy’s current performance.

In the second quarter of the year, gross domestic product (GDP) growth accelerated to 5.6 percent from 5 percent in the first quarter.

This brought the first-semester growth to 5.3 percent, still one of the fastest growth rates in the region.

“Exports did detract from overall growth, but the drag was easily offset by robust household consumption, private investment, and government spending. In short, the Philippine economy is firing on several cylinders,” Incalcaterra said.

“Contrary to the soft-patch the rest of Asia is going through, the Philippines finds itself in a different position. It is less sensitive to the deterioration in external demand compared to North Asian economies, while at the time not as dependent on commodity prices as many of its Asean (Association of Southeast Asian Nation) partners,” he said.

Incalcaterra said the Philippine economy would likely stay robust in the coming quarters despite poor external sentiment, noting that productive activities are broadly supported by ample liquidity in the banking system.

He said growth would continue to be supported by increased government spending in the coming quarters, especially since private consumption historically strengthens before national elections.

The Philippines is set to elect a new president by May next year.

Given that the economy has enough gas to expand, the economist suggested this was the first reason why the inflation-targeting BSP had no need to release more liquidity into the system.

Another reason to keep monetary settings on hold this Thursday, Incalcaterra said, was the US Federal Reserve Open Market Committee’s recent move to keep its own targeted interest rate steady. Before last month’s global stock market meltdown that was triggered by concerns on the Chinese economy, many had expected the US Fed to raise interest rates for the first time in a decade now that the US economy was gaining strength.

The US Fed’s decision not to take action in September, however, only prolonged the waiting game especially given indications that a rate hike will still be on the table this year.

The HSBC economist said the “uncertainty surrounding the timing of the Fed’s lift-off is likely to increase and the BSP will need to remain vigilant of potential outflows.”

Among the key risks to watch out for would be downside risk to overseas remittances, given the importance of such inflows in supporting consumption, the economist said. Remittances surprised sharply on the downside in July, growing 0.5 percent year-on-year compared to expectations of growth of over 5 percent.

Given the importance of remittances in supporting consumption, the weak reading is a cause for concern if sustained, and will be monitored by the BSP.

On consumer prices, the HSBC economist said monetary authorities remained vigilant against potential future headwinds. In particular, he said the El Niño effect may carry acute risks to food output and may exacerbate food prices, which make up 39 percent of the CPI (consumer price index) basket, and may have a significant impact on the poorer segments of the population.

And as the effects of the plunge in oil prices wears off, the HSBC economist said base effects would lift inflation back into the BSP target range of 2 to 4 percent, a range that would likely remain for the next year.

“Unlike last year, this time around the El Niño is not a false alarm. All key meteorological agencies state with relative certainty that El Niño conditions have been met and that its intensity will surpass the last destructive El Niño in 1997-98,” Incalcaterra said.

“Accordingly, dry weather and drought conditions are expected to persist over the next few months. Apart from the inflationary impact mentioned above, there is also the risk that drought conditions suppress rural incomes. While agricultural production as a share of GDP has come down over the years, it still garners an important 13 percent of GDP and as we mentioned above, the impact on the CPI basket and household consumption is significant,” he said.