Interest rates seen to stay low in 2016

KEY PHILIPPINE interest rates may remain low through 2016. But the peso could depreciate to the P48:$1 level as the start of the US monetary tightening cycle props up the US dollar while a sluggish global economic backdrop heightens risks of currency wars, a top Citibank economist said.

In an interview last week, Citibank head of Citi Asia-Pacific economic and market analyst Johanna Chua said that with the start of US Federal Reserve’s interest rate lift-off, the consequent strengthening of the dollar would continue to put pressure on other currencies, especially in emerging markets, resulting in more volatile capital flows.

Chua, a Filipina economist based in Hong Kong, said the Philippine peso—while relatively resilient compared to other currencies in the region—would unlikely decouple from market volatility that would arise as the US Fed further hikes interest rates. Citi’s forecast is that the peso could depreciate to P48.50:$1 through next year. The local unit closed at P47.34 against the greenback on Friday.

In general, Citi forecasts a 5-6 percent depreciation of most emerging market currencies versus the US dollar next year.

Market volatility is also seen to arise as notwithstanding the start of US interest rate increases, many central banks in the region are seen to head toward the opposite direction—cut interest rates given a backdrop of slowing economic growth and benign inflation.

“The only problem is that if the Fed is hiking, that will create more volatility on the foreign exchange,” she said. “But some countries want weaker currencies to loosen their monetary conditions.”

Last week, the US Fed raised the range of its benchmark interest rate by a quarter percentage to between 0.25 percent and 0.50 percent, affirming monetary authorities’ confidence on US economic recovery.

Chua said further increases in US Fed rates would likely be “very very slow,” summing up to an additional 50 basis points for 2016. After this December hike, Chua said the US Fed would likely pause for a full quarter, then hike rates anew by 25 basis points in the second quarter of 2016, then pause for a full quarter before another quarter-percentage hike in the fourth quarter.

For the Philippines, Chua said the Bangko Sentral ng Pilipinas (BSP) would likely keep its benchmark interest rates steady through 2016 despite the US’ tightening move.

In case of extreme financial market volatility, Chua said the BSP could always use the reserve requirement as a tool to mop up excess liquidity. With a benign outlook on inflation and muted oil prices, she said the BSP could even ease liquidity settings but noted that the base scenario would be to keep key interest rates steady.

Citi expects the Philippine domestic economy to grow by 5.1 percent next year, slower than the market consensus of 5.9 percent. By 2017, growth is forecast to improve to 5.5 percent.

Chua said Citi’s below-consensus outlook for next year was due to “interruption” from a combination of domestic political and global headwinds. “But I’m still optimistic that the investment cycle here has a long way to go,” she said.

Within Southeast Asia, Chua said the Philippines remained the bright spot along with Vietnam.

“My personal view is [interest rates] are going to be low. This is not a country that levered up a lot the way other countries levered up, so if you look at leverage ratios—maybe a few conglomerates have had a pick up in leverage—but by and large, households are not really levered. This is still a cash economy so when your rates are low for a long time, it could be quite a powerful engine for domestic demand,” she said.

At the margin, she said the start of the Fed’s cycle of interest rate hikes could thus affect the funding conditions of those who borrow in US dollars.